SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file Number 333-16867
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Outsourcing Solutions Inc.
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(Exact name of registrant as specified in its charter)
Delaware 58-2197161
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
390 South Woods Mill Road, Suite 350
Chesterfield, Missouri 63017
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 576-0022
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is not determinable, as the stock is not publicly traded.
APPLICABLE ONLY TO CORPORATE REGISTRANTS: As of March 29, 2001, the following
shares of the Registrant's common stock were issued and outstanding:
Voting common stock 6,088,479.30
Non-voting common stock 480,321.30
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6,568,800.60
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DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Current Report on
Form 8-K, filed on June 30, 2000, are incorporated into Part II. Item 9.
PART I
ITEM 1. BUSINESS
General
Outsourcing Solutions Inc. (the "Company" or "OSI"), a Delaware
corporation, is one of the largest providers of accounts receivable management
services in the United States with 2000 revenues of approximately $542.6
million. The Company believes that it differentiates itself from its competitors
by providing a full range of accounts receivable management services on a
national basis that provide its customers the opportunity to outsource the
management of the entire credit cycle. The breadth of services the Company
provides across all stages of the credit cycle allows itself to cross-sell
services to existing customers as well as to expand its customer base by
providing specific services to potential customers in targeted industries. These
services include collection services, portfolio purchasing services and
outsourcing services which accounted for approximately 65%, 16% and 19% of 2000
revenues, 69%, 16% and 15% of 1999 revenues and 70%, 17% and 13% of 1998
revenues, respectively.
o Collection services involve collecting delinquent or charged-off consumer
accounts for a fixed percentage of realized collections or a fixed fee per
account.
o Portfolio purchasing services involve acquiring portfolios of charged-off
consumer receivables from credit grantors or other owners, servicing such
portfolios and retaining all amounts collected.
o Outsourcing services include contract management of accounts receivable,
billing, teleservicing and other services.
The Company manages the marketing and execution of services within the four
stages of the credit cycle. In the first stage of the credit cycle, OSI provides
customers with the ability to outsource services including credit authorization,
usage management and customer service. Dedicated call centers provide "first
party" services for its clients performing all operations in their name. The
second stage of the credit cycle is the management of pre-uncollectable, or
charge-off, delinquency situations. OSI provides clients with fixed fee
early-out programs based on either a letter series or calling program for
accounts that are generally less than 180 days past due. In the third stage of
the credit cycle, the Company offers traditional contingent collection services
for delinquent and charged-off receivables. In the fourth and final stage of the
credit cycle, OSI acts as a principal and purchases both new and delinquent
charged-off receivables from credit grantors or other owners.
The accounts receivable management industry is highly fragmented. The
Company estimates there are approximately 6,000 debt collection service
companies in the United States, with the 10 largest agencies accounting for
approximately 20% of industry revenues. Competition is based largely on recovery
rates, industry experience and reputation and service fees. Large volume credit
grantors typically employ more than one accounts receivable management company
at one time, and often compare performance rates and rebalance account
placements towards higher performing servicers.
The customer base for the accounts receivable management industry is
generally concentrated by credit grantors in four end-markets: banks, health
care, utilities and telecommunications. Other significant sources of account
placements include retail, student loan and governmental agencies. The Company
believes that the ongoing consolidation in the banking, health care, utilities
and telecommunication industries will benefit them by creating larger national
customers seeking to place accounts with accounts receivable management
companies that offer national rather than local and regional coverage. The
Company's customers include a full range of local, regional and national credit
grantors. The Company's largest customer accounted for no more than 8% of 2000
revenues.
The Company was formed in 1995 to acquire Account Portfolios L.P., one of
the largest purchasers and servicers of non-performing accounts receivables
portfolios. Since its formation, the Company has completed seven additional
acquisitions and has established itself as a leading industry consolidator. The
Company has experienced significant growth in their business through internal
growth and acquisitions, with its revenues increasing from $29.6 million in 1995
to $542.6 million in 2000.
Industry
The accounts receivable management industry has experienced significant
growth over the past 15 years. The rapid growth of outstanding consumer credit
and the corresponding increase in delinquencies and charge-offs has resulted in
credit grantors increasingly looking to third party service providers in
managing the accounts receivable process. In 1998, the contingent fee collection
industry, the Company's largest business service, was estimated to be a $6.5
billion market growing at approximately 8% to 10% per annum. The Company's other
business services such as portfolio purchasing and outsourcing services are
estimated, in the aggregate, to be an approximately $3.0 billion market. The
Company believes the following are the key trends in the accounts receivable
management industry:
o Increase in Consumer Debt and Delinquencies. Consumer debt, a leading
indicator of current and future business for accounts receivable management
companies, more than doubled in the past ten years, increasing from $3.6
trillion in 1990 to $7.5 trillion in 2000. The ratio of household debt,
including mortgages, to disposable income increased almost 25% in the same
period. Toward the end of 2000, 3.6% of consumer loans were delinquent.
Overall, U.S. consumer debt levels are higher than ever and are expected to
increase steadily in coming years.
o Increase in Commercial Debt and Delinquencies. Commercial debt has climbed
to its highest level to date - $1.1 trillion in June 2000, a 42% increase
over 1991 figures. As with consumer debt, commercial debt is expected to
continue to rise over the next several years.
o Industry Consolidation. The American Collectors Association estimates that
there are approximately 6,000 contingent fee companies in the United States
participating in an industry that generated over $6.5 billion in contingent
fee collection revenue in 1998. The industry has undergone significant
consolidation, with the top ten contingent fee companies increasing their
industry share to over 20% in 1998. Given the high number of debt
collection companies in the United States, the financial and competitive
constraints facing these smaller companies and the limited number of
liquidity options for the owners of such businesses, the Company believes
that the industry will continue to experience consolidation.
Well-capitalized companies that offer national capabilities with a "full
service" approach to accounts receivable management are increasingly
displacing local and regional competitors.
o Customer Consolidation. The largest credit granting industries, including
banking, utilities, telecommunications and health care, account for 80% of
accounts placed for collection and are experiencing rapid consolidation.
This consolidation has forced companies to focus on core business
activities and to outsource ancillary functions, including some or all
aspects of the accounts receivable management process. As a result, many
regional customers are becoming national in scope and are shifting account
placements to accounts receivable management companies that have the
ability to service a large volume of placements on a national basis. The
Company established relationships with many of the target industries'
largest consolidators, thereby improving its ability to capitalize on this
consolidation trend.
o Growth in Portfolio Sales. As one of the leading providers of portfolio
purchasing services, we have participated in the rapid and consistent
industry-wide increase in the amount of charged-off consumer receivables
sold by credit grantors. Portfolio sales offer the credit grantor many
benefits, including increased predictability of cash flow, reduction in
monitoring and administrative expenses and reallocation of assets from
non-core business functions to core business functions. It is estimated
that $28.1 billion of charged-off receivables were acquired by portfolio
purchasers in 1999 and more than $30.0 billion in 2000.
o Accelerated Trend toward Outsourcing. Outsourcing in the U.S. continues to
grow at approximately 15% annually. In an effort to focus on core business
activities and to take advantage of economies of scale, better performance
and the lower cost structure offered by collection companies, many credit
grantors have chosen to outsource some or all aspects of the accounts
receivable management process. Instead of waiting until receivables are 180
days, in some instances 90 days, past due (or later) to turn over for
credit collection, credit grantors are now involving collection companies
much earlier in the process. Increasingly, credit grantors are looking to
accounts receivable management providers for assistance with billing,
customer service and complete call center outsourcing.
o Technological Sophistication. Leading companies in the industry are
increasingly using technology to improve their collection efforts. These
initiatives include investments in data warehousing, proprietary databases,
computerized calling systems, debtor location databases, web-based
reporting, and scoring and segmentation of receivables portfolios to
identify customized treatments and maximize recoveries.
Competitive Advantages
The Company believes that its strong market position, national presence and
breadth of services distinguishes itself as a leading provider of accounts
receivable management services in the United States. OSI believes its
competitive advantages include:
o Benefits of Scale. The benefits of scale in the accounts receivable
industry are significant on both revenues and cost. Scale makes it possible
for the Company to compete for larger blocks of revenue, deliver more
services over a wider geographic base, leverage its fixed costs over a
broader customer base and access capital at attractive rates. As customers
consolidate geographically and seek to reduce suppliers, a national
presence also provides an important competitive advantage.
o "One-stop-shopping" for Receivables Management Services. OSI provides a
full array of receivables management services including front-end credit
service, pre charge-off delinquency management, contingent collection
services and portfolio purchasing. This allows the Company to manage the
entire credit cycle for its customers for all sizes of debt and across
multiple industries. The Company is one of the few industry participants to
provide this breadth of services on a national basis.
o Broad Customer Base. OSI provides services to some of the largest and
fastest growing credit grantors in a wide range of industries. OSI's broad
customer base diversifies its revenue stream and provides the Company with
significant opportunities to cross-sell services. The Company also has
long-standing relationships with many of its customers which provides a
strong base of recurring revenues.
o Technology. The Company has made, and believes it will continue to make,
significant investments in technology and know-how to enhance its
competitive advantage. OSI believes that its proprietary software,
including debtor-scoring models, computerized calling and debtor databases,
provides them with a competitive advantage in pricing portfolios, providing
outsourcing services and collecting delinquent accounts. The Company's
systems interface with those of its customers to receive new account
placements daily and provide frequent updates to customers on the status of
collections. OSI has become increasingly integrated with its customers'
systems resulting in higher switching costs for its customers.
o Customer Service. OSI's broad range of services and focused customer
approach enables the Company to actively support and customize services to
its customers on a cost-effective basis. This service philosophy has
provided the foundation for the Company's reputation and when combined with
its industry experience is critical in the clients' selection process.
Growth Strategies
The Company's strategy focuses on expanding its business and enhancing
profitability through the following initiatives:
o Cross Selling Services to Existing Customers. OSI offers its customers a
wide array of services including traditional fee services, portfolio
purchasing services, pre-charge-off programs, outsourcing of accounts
receivable management functions and teleservicing. This range of services
allows OSI to cross-sell offerings within its existing customer base and to
potential customers in specifically targeted industries.
o Expansion of Customer Base.
o Existing Target End-Markets. Increasingly, credit grantors in the
public and private sectors which have typically maintained accounts
receivable departments within their organizations are turning to
outside accounts receivable management companies. In addition,
consolidation in the banking, retail, utilities, student loan, health
care and telecommunications industries has created national customers
who are outsourcing a portion or all of their accounts receivable
management service needs to national providers. As OSI enhances its
expertise and reputation with customers in a target end-market, the
Company markets that expertise to other credit grantors in that
end-market. The Company's relative size, ability to provide services
in all 50 states and experience in successfully managing a high volume
of placements on a national basis allows it to benefit from the
consolidation of these key industries.
o New Target Industries. OSI intends to capitalize on its expertise and
reputation to penetrate new end-markets. For example, the Company
plans to continue to focus on increasing its business activities with
governmental agencies at the federal, state and local levels, which
have begun to outsource tax, child support collection and student loan
accounts receivable functions to private companies. In addition, the
Company plans to focus on the commercial market segment (collection of
delinquent accounts owed by businesses to other businesses) and
health care segment of the industry. Traditionally, the commercial
market has been underpenetrated by collection agencies given the need
for tailored collection methods which differ from those used in the
consumer market. In addition, significant changes and cost reductions
in the health care market require specialized skills in the collection
of past due accounts.
o Disciplined Acquisitions. The Company has built its position as an industry
leader through strategic acquisitions of leading accounts receivable
service providers. By successfully integrating these businesses, its
management has demonstrated an ability to evaluate, execute and integrate
acquisitions. With over 6,000 contingent fee accounts receivable collection
companies in the United States, OSI plans to pursue additional acquisitions
that complement its existing services or expand its customer base and is
continually reviewing acquisition opportunities.
o Cost Reductions. The Company's management has adopted an aggressive
approach to cost management. The Company plans to continue to focus on
reducing its overall costs and improving operational efficiencies.
Acquisition and Integration History
In September 1995, OSI was formed and acquired Atlanta-based Account
Portfolios, one of the largest purchasers and servicers of non-performing
accounts receivable portfolios.
In January 1996, OSI acquired Continental Credit Services, Inc.
("Continental") and A.M. Miller Associates, two industry leaders in providing
contingent fee services. Continental, which was headquartered in Seattle and
operated in eight western states, provided contingent fee services to a wide
range of end-markets with particular emphasis on public utilities and regional
telecommunications. A.M. Miller, based in Minneapolis, provided contingent fee
services to the student loan and bank credit card end markets.
In November 1996, OSI acquired Payco American Corporation with corporate
offices in Brookfield, Wisconsin. Originally founded as a contingent fee service
company, Payco diversified into other outsourcing services such as student loan
billing, health care accounts receivable billing and management, and contract
management of accounts receivable and teleservicing.
In October 1997, OSI acquired the assets of North Shore Agency, Inc., a fee
service company headquartered in Westbury, New York. North Shore specialized in
"letter series" collection services for direct marketers targeted at collecting
small balance debts. The majority of North Shore's revenues were generated from
traditional contingent collections utilizing letters with the remaining revenues
derived from fixed fee letter services.
In November 1997, OSI acquired the assets of Accelerated Bureau of
Collections, Inc. Accelerated Bureau of Collections was a Denver-based national
fee service company. It specialized in credit card collection and derived
approximately 25% of its revenues from pre-charge-off programs with the
remaining 75% of revenues derived from standard contingent fee collections.
In March 1998, OSI completed the acquisition of The Union Corporation
("Union"). Union was originally a conglomerate involved in businesses ranging
from electronic and industrial components to financial services. Union was a
leading provider of a range of outsourcing services to both large and small
clients. Union provided contingent and fixed fee collection services and other
related outsourcing services. Union provided fee services through the following
wholly-owned subsidiaries: Allied Bond & Collection Agency, Inc., Capital Credit
Corporation, and Transworld Systems, Inc. Allied, headquartered in Trevose,
Pennsylvania, provided contingent and fixed fee collection services for large
clients across a broad spectrum of industries. Capital Credit, headquartered in
Jacksonville, Florida also provided contingent and fixed fee collection services
for large national clients primarily serving the bankcard, telecommunications,
travel and entertainment, and government sectors. Transworld, headquartered in
Rohnert Park, California, is one of the largest prepaid, fixed fee providers of
delinquent account management services in the United States. Transworld's
clients are primarily small companies with low balance delinquent accounts.
Union provided related outsourcing services through its Interactive Performance,
Inc. and High Performance Services, Inc. subsidiaries. Interactive Performance
headquartered in North Charleston, South Carolina, provided a range of credit
and receivables management outsourcing services primarily in the form of
teleservicing. Interactive Performance services included inbound and outbound
calling programs for credit authorization, customer service, usage management
and receivable management. High Performance Services, headquartered in
Jacksonville, Florida, provided services similar to Interactive Performance for
clients in the financial services industry.
In 1999, as part of a strategy to increase the efficiency of its operations
by aligning the Company along business services and establishing call centers of
excellence by industry specialization and in order to market its services under
one OSI brand, the Company reorganized many of its acquired subsidiaries.
Account Portfolios changed its name to OSI Portfolio Services, Inc. Payco
American Corporation's largest debt collection subsidiary changed its name to
OSI Collection Services, Inc. and Continental, A.M. Miller, Accelerated Bureau
of Collections, Allied Bond & Collection Agency and Capital Credit merged into
OSI Collection Services. Interactive Performance changed its name to OSI
Outsourcing Services, Inc., and the Interactive Performance and High Performance
Services subsidiaries merged into OSI Outsourcing Services. The Company now
provides specialized services for the following industries: health care,
government, education, telecommunications/utilities, commercial, financial
services and bank card.
As part of its strategy to expand its outsourcing services, in September
2000, the Company through a newly formed limited liability company, RWC
Consulting Group, LLC, acquired certain assets and assumed certain liabilities
of RWC Consulting Group, Inc. ("RWC"), a service company providing
highly-skilled consultants to banks to assist in their back office functions.
Total consideration for RWC included cash of approximately $17.0 million
including transaction costs of $225,000, voting common stock worth $2.0 million
(53,376.03 shares) and an 18% unsecured, subordinated note of $5.0 million
(interest compounded annually and principal and interest due September 29,
2003). The cash portion of the purchase price was financed under the Company's
revolving credit facility. The acquisition was accounted for under the purchase
method and the excess of cost over the fair value of the net assets acquired is
being amortized on a straight-line basis over 30 years. The acquisition contains
a certain contingent payment obligation based on the attainment of a certain
financial performance target over the next three years. The future contingent
payment obligation, if any, will be accounted for as additional goodwill if the
payment is deemed probable.
Recapitalization
On December 10, 1999, pursuant to a Stock Subscription and Redemption
Agreement, dated as of October 8, 1999, as amended (the "Recapitalization
Agreement"), by and among Madison Dearborn Capital Partners III, L.P. (together
with its affiliates, "MDP"), the Company, and certain of the Company's
stockholders, optionholders and warrantholders: (i) the Company sold
5,323,561.08 shares of its common stock, par value $.01 per share, to certain
purchasers for an aggregate purchase price of $199.5 million; (ii) the Company
sold 100,000 shares of its Senior Mandatorily Redeemable Preferred Stock to
certain purchasers for an aggregate purchase price of $100 million; (iii) the
Company redeemed 4,792,307.20 shares of the Company's common stock (including
voting common stock, par value $.01 per share, Class A Convertible Nonvoting
Common Stock, par value $.01 per share, Class B Convertible Nonvoting Common
Stock, par value $.01 per share, Class C Convertible Nonvoting Common Stock, par
value $.01 per share and 1,114,319.33 shares of its preferred stock, no par
value) for an aggregate of $221.35 million (such transactions collectively
referred to herein as the "Recapitalization"). Immediately after the
Recapitalization, MDP owned approximately 70.3% of the outstanding common stock
(75.9% of the outstanding voting common stock) of the Company. Prior to the
Recapitalization, the Company was controlled by McCown DeLeeuw & Co., Inc., a
private equity investment firm.
In connection with the Recapitalization, all members of the Company's Board
of Directors other than Timothy Beffa resigned and Paul Wood and Tim Hurd were
elected to serve as directors. In addition, the stockholders and optionholders
of the Company entered into a stockholders agreement (the "Stockholders
Agreement"). The Stockholders Agreement provides for the election of individuals
to the Board of Directors of the Company and includes restrictions on the
transfer of capital stock, and the provision of registration, preemptive, tag
along and drag along rights granted to the parties thereto.
In conjunction with the Recapitalization, the Company also entered into a
Credit Agreement among the Company, DLJ Capital Funding, Inc., as Syndication
Agent, Harris Trust & Savings Bank, as Documentation Agent, Fleet National Bank,
N.A., as Administrative Agent and other Lenders who are parties thereto (the
"Credit Agreement"). The Credit Agreement provides for: (i) a $150 million Term
A Loan Facility; (ii) a $250 million Term B Loan Facility; and (iii) a $75
million Revolving Loan Facility. Borrowings under the Credit Agreement were used
to refinance the Company's existing credit agreement and will be used for other
working capital, acquisitions and general corporate purposes.
Services and Operations
The Company is one of the largest providers of accounts receivable
management services in the United States. Through its subsidiaries, the Company
offers customers collection services, portfolio purchasing services and related
outsourcing services.
Collection Services
The Company is one of the largest providers of collection services in the
United States. The Company offers a full range of contingent fee (percentage of
realized collections) services, including pre-charge-off programs and letter
series, to most consumer credit end-markets. The Company utilizes sophisticated
management information systems and vast experience with locating, contacting and
effecting payment from delinquent account holders in providing its core
contingent fee services. With 54 call centers in 25 states and approximately
2,500 account representatives, the Company has the ability to service a large
volume of accounts with national coverage. In addition to traditional contingent
fee services involving the placement of accounts, creditors have begun to demand
services in which accounts are outsourced earlier in the collection cycle. The
Company has responded to this trend by developing "early-out" programs, whereby
the Company receives placed accounts that are often less than 180 days past due
and earn a fixed fee per placed account rather than a percentage of realized
collections. These programs require a greater degree of technological
integration between OSI and its customers, leading to higher switching costs for
the Company's customers. The Company primarily services consumer creditors,
although the Company has a growing presence in the commercial collection
business, offering contingent fee services to commercial creditors.
Contingent fee services are the traditional services provided in the
accounts receivable management industry. Credit grantors typically place
non-performing accounts after they have been deemed non-collectible, usually 90
to 180 days past due, depending on the specific credit grantor policy, agreeing
to pay the servicer a commission level calculated on the amount of collections
actually made. At this point, the receivables are usually still valued on the
customer's balance sheet, albeit in a form at least partially reserved against
for possible noncollection. Customers typically use multiple agencies on any
given placement category, enabling them to benchmark each agency's performance
against the other. Placement is usually for a fixed time frame, typically a
year, at the end of which the agency returns the uncollected receivables to the
customer, which may then place them with an alternative agency.
The commission rate for contingent fee services is generally based on the
collectability of the asset in terms of the costs which the contingent fee
servicer must incur to effect repayment. The earlier the placement (i.e., the
less elapsed time between the past due date of the receivable and the date on
which the debt is placed with the contingent fee servicer), the higher the
probability of recovering the debt and, therefore, the lower the cost to collect
and the commission rate. Creditors typically assign their charged-off
receivables to contingent fee servicers for a twelve month cycle, and then
reassign the receivables to other servicers as the accounts become further past
due. There are three main types of placements in the contingent fee business,
each representing a different stage in the cycle of account collection. Primary
placements are accounts, usually 90 to 270 days past due, that are being placed
with agencies for the first time and usually receive the lowest commission.
Secondary placements, accounts 270 to 360 days past due, have already been
placed with a contingent fee servicer and usually require a process including
obtaining judgments, asset searches, and other more rigorous legal remedies to
obtain repayment and, therefore, receive a higher commission. Tertiary
placements, accounts usually over 360 days past due, generally involve legal
judgments, and a successful collection receives the highest commission.
Once the account has been placed with OSI, the fee service process consists
of (i) locating and contacting the debtor through mail, telephone, or both, and
(ii) persuading the debtor to settle his or her outstanding balance. Work
standards, or the method and order in which accounts are worked by OSI, are
specified by the customer, and contractually bind OSI. Some accounts may have
different work standards than others based on criteria such as account age or
balance. In addition, OSI must comply with the federal Fair Debt Collection
Practices Act and comparable state statutes, which restrict the methods it uses
to collect consumer debt.
The Company attempts to estimate the collectability of each placement using
sophisticated recovery score models that estimate both probability of payment
and resulting amount of that payment. The objective is to maximize revenues and
minimize expenses by matching the appropriate work effort with the expected
yield of each individual account. For example, every account is different in
some way much as no consumer is exactly like another. As a result, each account
may require a different combination of letters and calls to attain the expected
yield.
Outsourcing Services
As the volume of consumer credit has expanded across a number of
industries, credit grantors have begun demanding a wider range of outsourcing
services. In response, the Company has developed a number of other accounts
receivable management services. The Company leverages its call and data
management technology and operational expertise by offering the following
services:
o contract management, whereby the Company performs a range of accounts
receivable management services at the customer's or the Company's location,
o student loan billing, whereby the Company provides billing, due diligence
and customer services,
o health care accounts receivable management, whereby the Company assumes
responsibility for managing third-party billing, patient pay resolution,
inbound and outbound patient communication services and cash application
functions, and
o teleservicing whereby the Company offers inbound and outbound calling
programs, customer retention programs, market research and customer
service.
In addition, the Company offers banking and financial services transaction
processing. The services provided assist the Company's clients in back office
functions such as research and adjustment, reconcilement, charge-off recovery
and other areas.
In each client relationship, the cornerstone of the outsourcing strategy is
to customize services to its customers on terms that will lead to substantial
and increased growth rates in revenues and profit margins for the client as well
as more stabilized cash flows. Customer service and billing inquiry activities
are ideal candidates for outsourcing relationships for a number of reasons,
including: (i) the need for technological investments in automated call
management systems, (ii) activities that are labor intensive, and (iii) activity
volumes that are subject to fluctuations which make it difficult to maintain
stable employment levels and high utilization of the required equipment. By
offering outsourcing services to a variety of clients, the Company is able to
leverage its productive resources to greater efficiency levels. In addition, the
Company will continue to develop its expertise in outsourcing service delivery,
enhancing its creativity and effectiveness in managing various inbound programs
that a captive operation does not generally have. This can translate into higher
response rates and returns on investment for the client.
Portfolio Purchasing Services
While contingent fee servicing remains the most widely used method by
credit grantors in recovering non-performing accounts, portfolio purchasing has
increasingly become a popular alternative. Beginning in the 1980's, the
Resolution Trust Corporation and the Federal Deposit Insurance Corporation,
under government mandate, began to sell portfolios of non-performing loans.
Spurred on by the success of these organizations in selling charged-off debt,
other creditors likewise began to sell portfolios of non-performing debt. The
Company's management estimates the total principal value of purchased portfolios
at over $30 billion in 2000. The largest percentage of purchased portfolios
originated from the bank card receivable and retail markets and such portfolios
are typically purchased at a deep discount from the aggregate principal value of
the accounts, with an inverse correlation between purchase price and age of the
delinquent accounts. Once purchased, traditional collection techniques are
employed to obtain payment of non-performing accounts.
The Company offers portfolio purchasing services to a wide range of
financial institutions, telecommunications and retailers. The Company purchases
large and diverse portfolios of charged-off consumer receivables both on an
individually negotiated basis as well as through "forward flow" agreements.
Under forward flow agreements, the Company agrees, subject to due diligence, to
purchase charged-off receivables on a monthly basis. Credit grantors selling
portfolios to the Company realize a number of benefits including increased
predictability of cash flow, reduction in monitoring and administrative
expenses, and reallocation of assets from non-core business functions to core
business functions.
The Company's purchased portfolios consist primarily of consumer loans and
credit card receivables, student loan receivables and health club receivables
including portfolios purchased under forward flow agreements. The Company's most
recent portfolio acquisitions have been primarily health club and bank card
purchases. The Company continues to pursue acquisitions of portfolios in various
industries for both individually negotiated and forward flow purchases.
In 1999, the Company established its own portfolio purchasing valuation
unit to complement services previously provided by an independent portfolio
valuation firm.
In order to fund an increased level of portfolio purchasing, in October
1998 the Company established a financing conduit, in association with MBIA
Insurance Corporation. The conduit is expected to provide OSI with significantly
increased purchasing capacity necessary to expand its portfolio purchasing
activities at a lower aggregate cost of capital. The transaction structure
involves off-balance sheet treatment for a significant portion of prospective
portfolio purchases and the related financing, while providing a consistent
servicing revenue stream. Although the Company places most of its portfolio
purchases in the conduit, OSI will, when required, continue to place certain
portfolio purchases on its balance sheet. The revenue from owned portfolios is
derived from gross collections and offset by collection costs and portfolio
amortizations. Conversely, the off-balance sheet accounting treatment for
portfolios sold into the conduit creates service fee revenues which is a
percentage of gross collections, offset by collection costs but with no
portfolio amortization. In addition, from time to time, the Company may receive
income from the conduit representing excess collections above the original cost
to purchase the portfolio and related financing fees.
Financial Information about Industry and Geographic Segments
For detailed information concerning the Company's industry and geographic
segments, reference is made to Note 17 of the Financial Statements included
elsewhere in this Annual Report on Form 10-K.
Sales and Marketing
The Company has a sales force of approximately 80 sales representatives
providing comprehensive geographic coverage of the United States on a local,
regional and national basis, and, to a much lesser extent in, Puerto Rico,
Canada and Mexico. The Company, except its Transworld Systems subsidiary,
maintains a sales force and has a marketing strategy closely tailored to the
credit-granting markets that it serves. The Company's primary sales and
marketing objective is to expand its customer base in those customer industries
in which it has a particular expertise and to target new customers in high
growth end-markets. OSI emphasizes its industry experience and reputation - two
key factors considered by creditors when selecting an accounts receivable
service provider. The Company believes it will increasingly focus on
cross-selling its full range of services to its existing customers and will use
its product breadth as a key selling point in creating new business. The
Company's overall sales and marketing strategies are coordinated at its
principal executive offices in Chesterfield, Missouri.
The marketing force is responsible both for identifying and cultivating
potential customers, as well as retaining or increasing market share with
existing clients. The marketing force is generally organized around specific
industries and is also trained to market the overall benefits of its services,
providing a cross-selling function for all its business units. Compensation
plans for the marketing force are incentive based, with professionals receiving
a base salary and incremental compensation based on performance. The Company's
Transworld Systems subsidiary has a sales force of over 800 independent
contractors based in 110 offices.
Customers
The Company's customer base includes a full range of local, regional and
national credit grantors. The Company's largest customer accounted for no more
than 8% of 2000 revenues.
Employees
The Company employs approximately 7,600 people, of which 5,300 are account
representatives, 80 are sales representatives and 2,220 work in
corporate/supervisory and administrative functions. None of the Company's
employees are unionized, and the Company believes its relations with employees
are satisfactory.
The Company is committed to providing continuous training and performance
improvement plans to increase the productivity of its account representatives.
Account representatives receive extensive training in a classroom environment
for several days on the Company's procedures, information systems and
regulations regarding contact with debtors. The training includes technical
topics, such as use of on-line collection systems and computerized calling
techniques, as well as instruction regarding the Company's approach to the
collection process and listening, negotiation and problem-solving skills, all of
which are essential to efficient and effective collections.
Account representatives are then assigned to work groups for a training
period. Initially, the trainees only screen incoming calls. This allows less
experienced account representatives to communicate with debtors in a less
confrontational environment than may be experienced with outgoing calls.
Additionally, the trainees are assigned accounts, which based upon scoring by
the Company's information systems, have a higher likelihood of collection. After
the training period, the account representatives begin working accounts
directly.
Competition
The accounts receivable management industry is highly fragmented and
competitive. The Company estimates there are approximately 6,000 debt collection
service companies in the United States, with the 10 largest agencies accounting
for approximately 20% of industry revenues. Within the collection and
outsourcing services of the Company's business, large volume credit grantors
typically employ more than one accounts receivable management company.
Competition is based largely on recovery rates, industry experience and
reputation, and service fees. Within this market, our largest competitors
include Dun & Bradstreet, G.C. Services, IntelliRisk Management, NCO Group and
Vengroff, Williams & Associates.
The bidding process associated with the acquisition of purchased portfolios
has become more competitive as the number of participants in this business has
increased. The Company's largest competitors in this market include Asset
Acceptance Corp., ASTA Funding, Arrow Financial and Calvary Investments.
Environmental, Health & Safety Matters
Current operations of OSI and its subsidiaries do not involve activities
materially affecting the environment. However, The Union Corporation, a
subsidiary of the Company, is party to several pending environmental proceedings
involving the United States Environmental Protection Agency, or EPA, and
comparable state environmental agencies in Indiana, Maryland, Massachusetts, New
Jersey, Ohio, Pennsylvania, South Carolina and Virginia. All of these matters
relate to discontinued operations of former divisions or subsidiaries of Union
for which it has potential continuing responsibility. Upon completion of the
acquisition of Union, OSI, in consultation with both legal counsel and
environmental consultants, established reserves that it believes will be
adequate for the ultimate settlement of these environmental proceedings.
One group of Union's known environmental proceedings relates to Superfund
or other sites where Union's liability arises from arranging for the disposal of
allegedly hazardous substances in the ordinary course of prior business
operations. In most of these "generator" liability cases, Union's involvement is
considered to be de minimus (i.e., a volumetric share of approximately 1% or
less) and in each of these cases Union is only one of many potentially
responsible parties. From the information currently available, there are a
sufficient number of other economically viable participating parties so that
Union's projected liability, although potentially joint and several, is
consistent with its allocable share of liability. At one "generator" liability
site, Union's involvement is potentially more significant because of the volume
of waste contributed in past years by a currently inactive subsidiary.
Insufficient information is available regarding the need for or extent and scope
of any remedial actions which may be required. Union has recorded what it
believes to be a reasonable estimate of its ultimate liability, based on current
information, for this site.
The second group of matters relates to environmental issues on properties
currently or formerly owned or operated by a subsidiary or division of Union.
These cases generally involve matters for which Union or an inactive subsidiary
is the sole or primary responsible party. In one case, the Metal Bank Cottman
Avenue site, the EPA issued a record of decision on February 6, 1998. According
to the record of decision, the cost to perform the remediation selected by the
EPA for the site is estimated by the EPA to be approximately $17.3 million. The
aggregate amount reserved by Union for this site was $18.2 million, which
represented Union's best estimate of the ultimate potential legal and consulting
costs for defending its legal and technical positions regarding remediation of
this site and its portion of the potential remediation costs that will
ultimately be incurred by it, based on current information. However, Union may
be exposed to additional substantial liability for this site as additional
information becomes available over the long-term. Actual remediation costs
cannot be computed until such remedial action is completed. Some of the other
sites involving Union or an inactive subsidiary are at a state where an
assessment of ultimate liability, if any, cannot reasonably be made at this
time.
It is Union's policy to comply fully with all laws regulating activities
affecting the environment and to meet its obligations in this area. In many
"generator" liability cases, reasonable cost estimates are available on which to
base reserves on Union's likely allocated share among viable parties. Where
insufficient information is available regarding projected remedial actions for
these "generator" liability cases, Union has recorded what it believes to be
reasonable estimates of its potential liabilities. Reserves for liability for
sites on which former operations were conducted are based on cost estimates of
remedial actions projected for these sites. OSI periodically reviews all known
environmental claims, where information is available, to provide reasonable
assurance that reserves are adequate.
Governmental Regulatory Matters
Certain of the Company's operations are subject to the Fair Debt Collection
Practices Act, or FDCPA, and comparable statutes existing in many states. Under
the FDCPA, a third-party collection agency is restricted in the methods it uses
to collect consumer debt. For example, a third-party collection agency (1) is
limited in communicating with persons other than the consumer about the
consumer's debt, (2) may not telephone at inconvenient hours, and (3) must
provide verification of the debt at the consumer's request. Requirements under
state collection agency statutes vary, with most requiring compliance similar to
that required under the FDCPA. In addition, most states and certain
municipalities require collection agencies to be licensed with the appropriate
authorities before collecting debts from debtors within those jurisdictions. It
is the Company's policy to comply with the provisions of the FDCPA, comparable
state statutes and applicable licensing requirements. The Company has
established policies and procedures to reduce the likelihood of violations of
the FDCPA and related state statutes. For example, all of the Company's account
representatives receive extensive training on these policies and must pass a
test on the FDCPA, and the Company's agents work in an open environment which
allows managers to monitor interaction with debtors.
From time to time, certain of the Company's subsidiaries have been subject
to consent decrees with various governmental agencies, none of which currently
have a material effect on the Company's financial condition, cash flows or
results of operations.
ITEM 2. PROPERTIES
As of December 31, 2000, the Company and its subsidiaries operated 70
facilities in the U.S., all of which are leased, except for three administrative
and collection offices operated by Transworld Systems, which are owned. The
Company believes that such facilities are suitable and adequate for its
business. The Company's facilities are strategically located across the U.S. to
give effective broad geographic coverage for customers and access to a number of
labor markets.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 2000, the Company was involved in a number of legal
proceedings and claims that were in the normal course of business and routine to
the nature of the Company's business, none of which are currently expected to
have a material effect on the Company's financial condition, cash flows or
results of operations. In addition, one of the OSI subsidiaries, Union, is party
to several pending environmental proceedings discussed elsewhere herein. While
the results of litigation cannot be predicted with certainty, the Company has
provided for the estimated uninsured amounts and costs to resolve the pending
suits and management, in consultation with legal counsel, believes that reserves
established for the ultimate settlement of such suits are adequate at December
31, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
No public market currently exists for the Company's Voting common stock and
Nonvoting common stock.
As of March 29, 2001, there were approximately 40 holders of record of the
Voting common stock and Nonvoting common stock.
The Company has not declared any cash dividends on any of its common stock
since the Company's formation in September 1995. The Indenture (the
"Indenture"), dated as of November 6, 1996, by and among the Company, the
Guarantors (as defined therein) and Wilmington Trust Company, as Trustee, with
respect to the 11% Series B Senior Subordinated Notes due 2006 contains
restrictions on the Company's ability to declare or pay dividends on its capital
stock. Additionally, the Credit Agreement dated as of November 30, 1999 among
the Company, the Lenders listed therein, DLJ Capital Funding, Inc., as the
Syndication Agent, Harris Trust and Savings Bank, as the Documentation Agent,
and Fleet National Bank, as the Administrative Agent (the "Credit Agreement")
contains certain restrictions on the Company's ability to declare or pay
dividends on its capital stock. The Indenture, the Credit Agreement and the
Certificate of Designation of the powers and preferences and relative
participating, optional and other special rights of Class A 14% Senior
Mandatorily Redeemable Preferred Stock, Series A, and Class B 14% Senior
Mandatorily Redeemable Preferred Stock, Series A, and qualifications and
limitations and restrictions thereof prohibit the declaration or payment of any
Common Stock dividends or the making of any distribution by the Company or any
subsidiary (other than dividends or distributions payable in stock of the
Company) other than dividends or distributions payable to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data set forth below have been
derived from, and are qualified by reference to the audited Consolidated
Financial Statements of OSI for, and as of, each of the fiscal years in the five
year period ended December 31, 2000. The selected financial data set forth below
should be read in conjunction with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying notes
thereto of OSI included elsewhere herein.
Year Ended December 31,
-----------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
($ in thousands)
Income Statement Data:
Operating revenue..................... $106,331 $271,683 $479,400 $504,425 $542,627
Salaries and benefits................. 46,997 133,364 230,114 244,157 264,293
Other operating expenses (a).......... 80,357 156,738 221,598 224,616 233,328
Compensation expense related to
redemption of stock options....... - - - - 187
Change in control bonuses, stock option
redemption and other bonuses...... - - - 10,487 -
Nonrecurring conversion, realignment
and relocation expenses........... - - - 5,063 2,742
Recapitalization related costs........ - - - 6,827 -
-------- -------- -------- -------- --------
Operating income (loss)............... (21,023) (18,419) 27,688 13,275 42,077
Interest expense, net................. 12,131 28,791 50,627 52,265 60,934
-------- -------- -------- -------- --------
Loss before taxes..................... (33,154) (47,210) (22,939) (38,990) (18,857)
Provision for income taxes (benefit).. (11,757) 11,127 830 759 594
Minority interest..................... - - 572 - -
-------- -------- -------- -------- --------
Loss before extraordinary item........ $(21,397) $(58,337) $(24,341) $(39,749) (19,451)
Extraordinary loss.................... - - - 4,208 -
-------- -------- -------- -------- --------
Net loss.............................. $(21,397) $(58,337) $(24,341) $(43,957) $(19,451)
======== ======== ======== ======== ========
Balance Sheet Data (at end of period):
Total assets.......................... $355,207 $381,690 $618,491 $624,712 $636,854
Total debt............................ 247,616 324,966 528,148 518,307 539,463
Mandatorily redeemable preferred stock - - - 85,716 (c) 103,455
Stockholders equity (deficit)......... 51,598 (5,478) (30,032) (93,948)(c)(128,755)
Other Financial Data:
Amortization of purchased portfolios.. $27,317 $52,042(d) $50,703(e) $38,722 $28,092
Other depreciation and amortization... 18,281 33,574 30,007 31,095 31,885
Cash capital expenditures............. 2,606 9,489 13,480 18,437 18,398
On-balance sheet portfolio purchases.. 10,373(f) 46,494 43,186 23,176 12,835
Cash flows from:
Operating activities and portfolio
purchasing.................... (2,978) (13,669) 12,066 (3,652) 24,792
Investing activities.............. (186,790) (73,005) (184,619) (21,549) (36,714)
Financing activities.............. 202,796 75,394 178,150 22,446 16,136
EBITDA (b)............................ 24,575 67,197 108,398 83,092 102,054
Adjusted EBITDA (b)................... 25,775 67,197 108,398 105,469 104,983
(a)Other operating expenses include telephone, postage, supplies, occupancy
costs, data processing costs, depreciation, amortization and miscellaneous
operating expenses.
(b)EBITDA is defined as income from continuing operations before interest,
taxes, depreciation and amortization. Adjusted EBITDA reflects EBITDA as
defined above adjusted for the non-recurring write-off of acquired technology
in process in connection with the Payco acquisition and relocation expenses
incurred by Continental of $1,000 and $200, respectively, in the year ended
December 31, 1996, the change in control bonuses, stock option redemption and
other bonuses; nonrecurring conversion, realignment and relocation expenses;
and recapitalization related expenses of $10,487, $5,063 and $6,827,
respectively, in the year ended December 31, 1999; and the compensation
expense related to redemption of stock options and the nonrecurring
realignment expenses of $187 and $2,742, respectively, in the year ended
December 31, 2000. EBITDA and Adjusted EBITDA are presented here, as
management believes they provide useful information regarding the Company's
ability to service and/or incur debt. EBITDA and Adjusted EBITDA should not
be considered in isolation or as substitutes for net income, cash flows from
continuing operations, or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles or as
measures of a company's profitability or liquidity. EBITDA and Adjusted
EBITDA may not be comparable to other companies.
(c)Due to the Recapitalization discussed elsewhere herein.
(d)In the fourth quarter of 1997, the Company completed an in-depth analysis of
the carrying value of the purchased portfolios acquired and valued in
conjunction with the Company's September 1995 acquisition of API. As a result
of this analysis, the Company recorded $10,000 of additional amortization
related to these purchased portfolios to reduce their carrying value to their
estimated net realizable value. This amount includes the $10,000 of
additional amortization.
(e)In the fourth quarter of 1998, the Company wrote down its investment in a
limited liability corporation (the "LLC") by $3,000 resulting from an
analysis of the carrying value of the purchased portfolios owned by the LLC.
This amount includes the $3,000.
(f)In May 1996, a subsidiary of the Company acquired participation interests in
certain loan portfolios, representing the undivided ownership interests in
such portfolios which were originally sold pursuant to existing Participation
Agreements ("MLQ Interests") for aggregate consideration of $14,772. This
amount excludes the $14,772.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues for the year ended December 31, 2000 were $542.6 million compared
to $504.4 million for the year ended December 31, 1999 - an increase of 7.6%.
The revenue increase of $38.2 million was due to increased collection,
outsourcing and portfolio services revenues. Revenues from collection services
were $353.4 million for the year ended December 31, 2000 compared to $349.7
million in 1999 due primarily to increased government and letter series business
partially offset by lower telecommunications business and the continued weakness
in the bank card market. The outsourcing services revenue of $101.7 million
compared favorably to $74.3 million in 1999 due to increased revenue of $21.7
million from new and existing business and $5.7 million from RWC, which was
acquired in September 2000. Revenues from portfolio services increased to $87.5
million for the year ended December 31, 2000 from $80.4 million for 1999. The
increased revenues were due to higher servicing fee revenues for the off-balance
sheet collections of OSI Funding LLC ("FINCO"), the Company's special purpose
finance company, portfolios partially offset by lower revenues from on-balance
sheet portfolios resulting from the shift from on-balance sheet ownership of
purchased loans and accounts receivable portfolios to off-balance sheet. During
the year ended December 31, 2000, the Company recorded revenue from FINCO
servicing fees of $26.8 million compared to servicing fees of $15.2 million for
1999.
Operating expenses, inclusive of salaries and benefits, service fees and
other operating and administrative expenses, were $437.6 million for the year
ended December 31, 2000 and $398.9 million for 1999 - an increase of 9.7%. The
increase in these operating expenses resulted primarily from higher collection
expenses, increased collection-related expenses due to the increased revenues of
collection and outsourcing services and increased collection expenses associated
with the increase in collections of on and off-balance sheet purchased
portfolios partially offset by lower consulting expenses. For the year ended
December 31, 2000, amortization and depreciation charges of $60.0 million were
lower than $69.8 million for 1999 - a decrease of 14.0%. The lower amortization
and depreciation charges resulted primarily from lower portfolio amortization as
a result of the shift towards off-balance sheet purchased loans and accounts
receivable portfolios.
For the year ended December 31, 2000, the Company incurred approximately
$0.2 million of additional compensation expense resulting from the redemption of
vested stock options.
In continuing with the strategy, adopted in early 1999, to align the
Company along business services and establish call centers of excellence by
industry specialization, the Company incurred nonrecurring realignment expenses
of $2.7 million which includes cost for closures of certain call centers,
severance associated with these office closures and certain other one-time
costs. These costs were recognized as incurred in 2000. See explanation of 1999
nonrecurring conversion, realignment and relocation expenses of $5.1 million in
the discussion of results of operations for year ended December 31, 1999
compared to year ended December 31, 1998.
In connection with the Recapitalization, the Company incurred $10.5 million
of additional compensation expense in 1999. This compensation expense consisted
primarily of expense relating to payment of cash for vested stock options and
the payment of change in control bonuses to certain officers in accordance with
terms of their employment agreements. In addition, the Company incurred $6.8
million of Recapitalization related costs in 1999. These costs consisted
primarily of professional and advisory fees, and other expenses.
Earnings before interest expenses, taxes, depreciation and amortization
("EBITDA") for the year ended December 31, 2000 was $102.1 million. Adding back
the nonrecurring charges and the additional compensation expense, adjusted
EBITDA was $105.0 million for the year ended December 31, 2000 compared to
$105.5 million after adding back the nonrecurring and Recapitalization related
expenses for 1999. The decrease of $0.5 million was primarily attributable to
the increased collection expenses in relation to the revenue reported from the
collections of purchased portfolios partially offset by the contribution from
increased collection and outsourcing services revenues and lower consulting
expenses.
While EBITDA was down slightly due to the off-balance sheet ownership of
the portfolios, depreciation and amortization also declined resulting in
operating income of $42.1 million. Adding back the nonrecurring charges of $2.7
million and the additional compensation expense of approximately $0.2 million,
operating income was $45.0 million for the year ended December 31, 2000 compared
to $35.7 million for 1999 after adding back the nonrecurring and
Recapitalization related expenses.
Net interest expense for the year ended December 31, 2000 of $60.9 million
compared unfavorably to $52.3 million in 1999 due primarily to higher interest
rates and higher amortization of deferred financing fees.
The provision for income taxes of $0.6 million was provided for certain
state and foreign income tax obligations. The Company generated a net operating
loss for federal and certain state income tax purposes in 2000, for which a full
valuation allowance was provided.
The extraordinary loss of $4.2 million in 1999, the write-off of previously
capitalized financing costs, resulted from the extinguishment of the then
existing credit facility in conjunction with the establishment of a new credit
facility in the fourth quarter of 1999.
The net loss for the year ended December 31, 2000 of $19.5 million compared
favorably to the net loss of $44.0 million for 1999 due primarily to the
nonrecurring and Recapitalization related expenses and the extraordinary item in
1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues for the year ended December 31, 1999 were $504.4 million compared
to $479.4 million for the year ended December 31, 1998 - an increase of 5.2%.
The revenue increase of $25.0 million was due primarily to increased collection
and outsourcing revenues of $19.7 million and $7.3 million from the full year
effect of the acquisition of Union in March 1998. Revenues from collection
services were $349.7 million for the year ended December 31, 1999 compared to
$334.9 million for 1998. The increase in collection services revenue was due to
a 2.7% increase in existing business and $5.7 million from the Union
acquisition. The outsourcing services revenue of $74.3 million compared
favorably to $62.1 million for 1998 due to increased revenue from new and
existing business of $10.6 million, or 17.0% and $1.6 million from the Union
acquisition. Revenues from purchased portfolio services decreased 2.4% to $80.4
million for the year ended December 31, 1999 from $82.4 million in 1998. The
decreased revenue was attributable to lower revenues from on-balance sheet
portfolios and lower strategic sales of portfolios offset by higher servicing
fee revenues for the off-balance sheet collections of portfolios which increased
due to the formation of FINCO. Prior to forming FINCO in October 1998, the
Company would record as revenue the total collections on purchased portfolios.
Currently, for all purchased portfolios which are sold to and financed by FINCO,
the Company records as revenue a servicing fee on the total collections of FINCO
purchased portfolios. During the year ended December 31, 1999, the Company
recorded revenue from FINCO servicing fees of $15.2 million compared to
servicing fees of $0.8 million in 1998.
Operating expenses, inclusive of salaries and benefits, service fees and
operating and administrative expenses, were $398.9 million for the year ended
December 31, 1999 and $371.0 million for the comparable period in 1998 - an
increase of 7.5%. The increase in these operating expenses resulted primarily
from the Union acquisition, higher collection-related expenses associated with
the increased revenues of collection and outsourcing services, increased
collection expenses associated with the increase in collections of purchased
portfolios, higher infrastructure costs and increased advertising and
promotional expenses and consulting expenses. For the year ended December 31,
1999, amortization and depreciation charges of $69.8 million compared to $80.7
million for 1998 - a decrease of 13.5%. The lower amortization and depreciation
charges resulted primarily from lower on-balance sheet portfolio amortization
offset partially by additional depreciation and amortization of goodwill related
to the Union acquisition and depreciation of current year capital expenditures.
During the fourth quarter of 1998 and the first quarter of 1999, the
Company evaluated its business strategy for its operations. After the Company's
formation and seven acquisitions, the Company adopted a strategy to align the
Company along business services and establish call centers of excellence by
industry specialization. As a result, nonrecurring conversion, realignment and
relocation expenses include costs resulting from the temporary duplication of
operations, closure of certain call centers along with relocation of certain
employees, hiring and training of new employees, costs resulting from the
conversion of multiple collection operating systems to a one industry operating
system, and other one-time and redundant costs, which are not expected to recur
as the realignment and integration plans are completed. These costs of $5.1
million were recognized as incurred during 1999.
In connection with the Recapitalization, the Company incurred $10.5 million
of additional compensation expense. This compensation expense consisted
primarily of expense relating to payment of cash for vested stock options and
the payment of change in control bonuses to certain officers in accordance with
terms of their employment agreements.
In addition, the Company incurred $6.8 million of Recapitalization related
costs. These costs consisted primarily of professional and advisory fees, and
other expenses.
As a result of the above, the Company generated operating income of $13.3
million for the year ended December 31, 1999. Adding back the nonrecurring
charges of $5.1 million, additional compensation expense of $10.5 million and
Recapitalization related costs of $6.8 million, operating income was $35.7
million for 1999 compared to $27.7 million for 1998.
Earnings before interest expense, taxes, depreciation and amortization
(EBITDA) for the year ended December 31, 1999 was $83.1 million. Adding back the
nonrecurring and Recapitalization related expenses, adjusted EBITDA was $105.5
million for 1999 compared to $108.4 million for the year ended December 31,
1998. The decrease was primarily attributable to the higher marketing costs
associated with branding initiatives, higher infrastructure and industry focused
expenses and the decreased portfolio service revenues due to the increased level
of off-balance sheet ownership of portfolios.
Net interest expense of $52.3 million for the year ended December 31, 1999
compared unfavorably to 1998 expense of $50.6 million due primarily to the
additional indebtedness incurred to finance the Union acquisition.
The provision for income taxes of $0.8 million was provided for certain
state and foreign income tax obligations. The Company generated a net operating
loss for federal and certain state income tax purposes in 1999, for which a full
valuation allowance was provided.
Minority interest in 1998 resulted from the Union acquisition. On January
23, 1998, the Company acquired approximately 77% of the outstanding common stock
of Union through a tender offer. The acquisition of all remaining outstanding
common stock of Union was completed on March 31, 1998. The Company recognized
minority interest in earnings of Union during the period from January 23, 1998
to March 31, 1998.
Due to the factors stated above, the loss before extraordinary item for the
year ended December 31, 1999 of $39.7 million compared unfavorably to $24.3
million in 1998.
The extraordinary item of $4.2 million, which related to the write-off of
previously capitalized financing costs, resulted from the extinguishment of the
existing credit facility in conjunction with the establishment of a new credit
facility in the fourth quarter of 1999.
Primarily as a result of the nonrecurring and Recapitalization related
expenses and the extraordinary item, net loss of $44.0 million for the year
ended December 31, 1999 compared unfavorably to the net loss of $24.3 million
for 1998.
Liquidity and Capital Resources
At December 31, 2000, the Company had cash and cash equivalents of $10.3
million. The Company's bank credit facility provides for a $75.0 million
revolving credit facility, which allows the Company to borrow for working
capital, general corporate purposes and acquisitions, subject to certain
conditions. As of December 31, 2000, the Company had outstanding $32.0 million
under the revolving credit facility leaving $36.2 million, after outstanding
letters of credit, available under the revolving credit facility.
Cash and cash equivalents increased from $6.1 million at December 31, 1999
to $10.3 million at December 31, 2000 principally due to cash from operating
activities and portfolio purchasing of $24.8 million and cash from financing
activities of $16.1 million primarily from the increase in the revolver of $19.0
million offset by the use of cash of $36.7 million primarily for capital
expenditures of $18.4 million and $16.7 million for the acquisition of certain
assets of RWC. In addition to the cash consideration for RWC of $16.7 million,
the purchase price included voting common stock worth $2.0 million and a $5.0
million 18% unsecured, subordinated note (interest compounded annually and
principal and interest due September 29, 2003) along with a contingent payment
obligation due in three years. The Company also held $22.0 million of cash for
clients in restricted trust accounts at December 31, 2000.
Cash and cash equivalents decreased from $8.8 million at December 31, 1998
to $6.1 million at December 31, 1999 principally due to the use of cash of $21.5
million for investing activities primarily for capital expenditures and the use
of cash of $3.7 million for operating activities and portfolio purchasing offset
by net cash from financing activities of $22.5 million, which was due to the
Recapitalization of the Company on December 10, 1999. In connection with the
Recapitalization, the Company entered into a new credit facility. The proceeds
of the new credit facility were used to refinance the indebtedness outstanding
under the then existing credit facility on the date of the Recapitalization.
Further discussion of the Recapitalization is included in the Company's
financial statements (Note 2) included herein. The Company also held $22.5
million of cash for clients in restricted trust accounts at December 31, 1999.
Purchased Loans and Accounts Receivable Portfolios decreased from $39.9
million at December 31, 1999 to $24.7 million at December 31, 2000 due primarily
to amortization of purchased portfolios of $28.1 million offset partially by new
on-balance sheet portfolio purchases of $12.8 million. In addition, the Company
purchased, and sold to FINCO, loans and accounts receivable portfolios of $86.9
million and $56.7 million during the years ended December 31, 2000 and 1999,
respectively.
The purchased loans and accounts receivable portfolios consist primarily of
consumer loans and credit card receivables, commercial loans, student loan
receivables and health club receivables. Consumer loans purchased primarily
consist of unsecured term debt. A summary of purchased loans and accounts
receivable portfolios at December 31, 2000 and December 31, 1999 by type of
receivable is shown below:
December 31, 2000 December 31, 1999
------------------------------ -----------------------------
Original Gross Recorded Net Original Gross Recorded Net
Principal Value Book Value Principal Value Book Value
--------------- ------------ --------------- ------------
(in millions) in thousands) (in millions) (in thousands)
Consumer loans.... $4,525 $9,477 $2,958 $16,141
Student loans..... 343 653 343 1,258
Credit cards...... 1,515 9,292 958 11,837
Health clubs...... 1,661 5,118 1,565 9,060
Commercial........ 129 150 129 1,651
------ ------- ------ -------
$8,173 $24,690 $5,953 $39,947
====== ======= ====== =======
Net deferred tax assets were zero at December 31, 2000 and 1999 due to a
valuation allowance of $95.2 million and $78.8 million, respectively. Temporary
differences giving rise to deferred tax assets at December 31, 2000 and December
31, 1999 relate principally to net operating loss carryforwards and future
deductible differences. The realization of this asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards in years
through 2020. At December 31, 2000, the Company has a cumulative valuation
allowance of $95.2 million to reflect management's assessment, based on the
weight of the available evidence of current and projected future book taxable
income, that there is significant uncertainty that any of the benefits from the
deferred tax assets will be realized. For all federal tax years since the
Company's formation in September 1995, the Company has incurred net operating
losses. Since the Company has a history of generating net operating losses and
is expected to continue to incur significant interest expense, management does
not expect the Company to generate taxable income in the foreseeable future
sufficient to realize tax benefits from the net operating loss carryforwards or
the future reversal of the net deductible temporary differences. The amount of
the deferred tax assets considered realizable, however, is subject to
reassessment in future years if estimates of future taxable income during the
carryforward period change.
The Company's current debt structure at December 31, 2000 consists of
$429.5 million indebtedness under the bank credit facility, $100.0 million 11%
Senior Subordinated Notes (the "Notes") and other indebtedness of $10.0 million.
See Note 6 of the Consolidated Financial Statements of OSI included elsewhere
herein for a description of the bank credit facility.
The Notes and the bank credit facility contain financial and operating
covenants and restrictions on the ability of the Company to incur indebtedness,
make investments and take certain other corporate actions. The debt service
requirements associated with the borrowings under the facility and the Notes
significantly impact the Company's liquidity requirements. Additionally, future
portfolio purchases may require significant financing or investment. The Company
anticipates that its operating cash flow together with availability under the
bank credit facility will be sufficient to fund its anticipated future operating
expenses and to meet its debt service requirements as they become due. However,
actual capital requirements may change, particularly as a result of acquisitions
the Company may make. The ability of the Company to meet its debt service
obligations and reduce its total debt will be dependent, however, upon the
future performance of the Company and its subsidiaries which, in turn, will be
subject to general economic conditions and to financial, business and other
factors including factors beyond the Company's control.
In October of 1998, a special-purpose finance company, OSI Funding Corp.,
formed by the Company, entered into a revolving warehouse financing arrangement
for up to $100.0 million of funding capacity for the purchase of loans and
accounts receivable over its five year term. In connection with the
Recapitalization, OSI Funding Corp. converted to a limited liability company and
is now OSI Funding LLC, a bankruptcy remote, non-consolidated subsidiary of the
Company, with OSI owning approximately 78% of the financial interest but having
only approximately 29% of the voting rights. The Company believes this
arrangement will provide it with expanded portfolio purchasing capability in a
very opportunistic buying market.
Capital expenditures for the year ended December 31, 2000 were $18.4
million. The Company expects to spend approximately $15.0 million on capital
expenditures (exclusive of any expenditures in connection with acquisitions) in
2001. Historical expenditures have been, and future expenditures are anticipated
to be primarily for replacement and/or upgrading of telecommunications and data
processing equipment, leasehold improvements and continued expansion of the
Company's information services systems. Subject to compliance with the
provisions of its debt agreements, the Company expects to finance future capital
expenditures with cash flow from operations, borrowings and capital leases. The
Company will reduce its future capital expenditures to the extent it is unable
to fund its capital plan. The Company believes that its facilities will provide
sufficient capacity for increased revenues and will not require material
additional capital expenditures in the next several years.
In March 2001, in keeping with its strategy to expand its outsourcing
services, the Company, through a newly formed limited liability company,
Coast-to-Coast Consulting, LLC acquired certain assets and assumed certain
liabilities of Coast-to-Coast Consulting, Inc. ("CCC") for cash of approximately
$16.2 million. CCC provides highly skilled experts to health care clients. The
services provided assist CCC's clients with on-site, back office functions such
as billing, collections, cash posting, special projects and other areas.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations for the years ended December 31, 2000, 1999 and 1998.
Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standard ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued and
subsequently amended by SFAS No. 138, Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted no later than January 1,
2001. The statement provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company's
derivative instruments are interest rate swaps. The Company believes these
instruments qualify for hedge accounting under SFAS No. 133 as amended by SFAS
No. 138. As of January 1, 2001, based on the Company's current derivative
instruments, the Company believes this statement will not have a material impact
on the consolidated statement of operations and consolidated balance sheet.
In September 2000, SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a replacement of FASB
Statement No. 125 was issued and is effective April 1, 2001. The statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The Company is currently
evaluating the impact of SFAS No. 140 on its consolidated statement of
operations and consolidated balance sheet and does not expect the impact on the
Company's financial condition, cash flows or results of operations to be
material.
Forward-Looking Statements
The following statements in this entire document are or may constitute
forward-looking statements made in reliance upon the safe harbor of the Private
Securities Litigation Reform Act of 1995: (1) statements concerning the
anticipated costs and outcome of legal proceedings and environmental
liabilities, (2) statements regarding anticipated changes in the accounts
receivable management industry, including but not limited to debt levels,
delinquencies, industry consolidation, customer consolidation and outsourcing
trends, (3) statements regarding anticipated changes in the Company's
opportunities in its industry, (4) statements regarding the Company's ability to
fund its future operating expenses and meet its debt service requirements as
they become due, (5) statements regarding the Company's expected capital
expenditures and facilities, (6) any statements preceded by, followed by or that
include the word "believes," "expects," "anticipates," "intends," "should,"
"may," or similar expressions; and (7) other statements contained or
incorporated by reference in this document regarding matters that are not
historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to: (1) the demand for the Company's
services, (2) the demand for accounts receivable management generally, (3)
general economic conditions, (4) changes in interest rates, (5) competition,
including but not limited to pricing pressures, (6) changes in governmental
regulations including, but not limited to the federal Fair Debt Collection
Practices Act and comparable state statutes, (7) legal proceedings, (8)
environmental investigations and clean up efforts, (9) expected synergies,
economies of scale and cost savings from recent acquisitions by the Company not
being fully realized or realized within the expected time frames, (10) costs of
operational difficulties related to integrating the operations of recently
acquired companies with the Company's operations being greater than expected,
(11) unanticipated realignment costs, (12) the Company's ability to generate
cash flow or obtain financing to fund its operations, service its indebtedness
and continue its growth and expand successfully into new markets and services,
and (13) factors discussed from time to time in the Company's public filings.
These forward-looking statements speak only as of the date they were made.
These cautionary statements should be considered in connection with any written
or oral forward-looking statements that the Company may issue in the future. The
Company does not undertake any obligation to release publicly any revisions to
such forward-looking statements to reflect later events or circumstances or to
reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the
normal course of business. From time to time and as required by the Company's
Credit Agreement, the Company will employ derivative financial instruments as
part of its risk management program. The Company's objective is to manage risks
and exposures of its debt and not to trade such instruments for profit or loss.
The Company uses interest rate swap and collared swap agreements to manage
the interest rate characteristics of its outstanding debt to a more desirable
fixed or variable rate basis or to limit the Company's exposure to rising
interest rates.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal and cash flows and related
weighted-average interest rates by expected maturity dates. For interest rate
swap and collared swap agreements, the table presents notional amounts and
weighted-average interest rates.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest Rate
(Dollars in millions)
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -------
Liabilities
Long-term debt
Fixed rate - - - - - $100.0 $100.0 $80.0
Average interest rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Variable rate $10.0 $17.5 $32.5 $40.0 $187.8 $141.7 $429.5 $429.5
Average interest rate (1) (1) (1) (1) (1) (1)
Interest Rate Derivative Financial Instruments Related to Debt
Interest Rate Swap
Notional amount - - - - - $50.0 $50.0 $0.4(2)
Average pay rate (3) (3) (3) (3) (3) (3)
Average receive rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Interest Rate Collared Swap
Notional amount - - $150.0 - - - $150.0 $(3.7)(2)
Strike cap rate 8.5% 8.5% 8.5% - - -
Strike floor rate 5.9% 5.9% 5.9% - - -
Strike swap rate 7.0% 7.0% 7.0% - - -
Forward rate (4) (4) (4) - - -
(1) Three-month LIBOR (6.4% at December 31, 2000) plus weighted average margin
of 3.7%.
(2) Represents the fair value of the interest rate swap agreement based on the
receivable (payment) to exit the agreement at December 31, 2000.
(3) One-month LIBOR (6.6% at December 31, 2000) plus margin of 3.5% (capped at
11.0% until November 2002 and 15.0% until maturity).
(4) Three-month LIBOR.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements and Supplementary Schedule
contained in Part IV hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item 9 is contained in the Company's
Current Report on Form 8-K, filed June 30, 2000, and incorporated herein by
reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Company are elected annually by its shareholders to serve
during the ensuing year or until a successor is duly elected and qualified.
Executive officers of the Company are duly elected by its Board of Directors to
serve until their respective successors are elected and qualified. The following
table sets forth certain information with respect to the directors and executive
officers of the Company.
Name Age Position or Office
- --------------------- --- -------------------------------------
Timothy G. Beffa 50 Director, President and
Chief Executive Officer
William B. Hewitt 62 Director
Timothy M. Hurd 31 Director and Vice President
Scott P. Marks, Jr. 55 Director
Richard L. Thomas 70 Director
Paul R. Wood 47 Director and Vice President
Michael A. DiMarco 43 Executive Vice President -
President of Specialty Business
Bryan K. Faliero 35 Executive Vice President Operations -
President of Portfolio Services
Michael B. Staed 54 Executive Vice President Sales -
Chief Sales and Marketing Officer
Gary L. Weller 40 Executive Vice President and
Chief Financial Officer
Timothy G. Beffa (50), President, Chief Executive Officer and Director of
Outsourcing Solutions Inc. since August 1996. From August 1995 until August
1996, Mr. Beffa served as President and Chief Operating Officer of DIMAC
Corporation ("DIMAC") and DIMAC DIRECT Inc. ("DDI") and a director of DDI. From
1989 until August 1995, Mr. Beffa served as a Vice President of DIMAC and as
Senior Vice President and Chief Financial Officer of DDI. Prior to joining
DIMAC, Mr. Beffa was Vice President of Administration and Controller for the
International Division of Pet Incorporated, a food and consumer products
company, where he previously had been Manager of Financial Analysis.
William B. Hewitt (62), Director of the Company since February 1998. Mr. Hewitt
has served as President and Chief Executive Officer of Sirius Ventures, Inc.
since February 1998. From July 1997 to January 1998, Mr. Hewitt served as
President and Chief Executive Officer of Union and prior to that he served as
President and Chief Operating Officer of Union since May 1995. Mr. Hewitt also
served as Chairman and Chief Executive Officer of Capital Credit Corporation
since September 1991, Chairman and Chief Executive Officer of Interactive
Performance, Inc. since November 1995 and Chairman and Chief Executive Officer
of High Performance Services, Inc. since May 1996. Capital Credit Corporation,
Interactive Performance, Inc. and High Performance Services, Inc. were
subsidiaries of Union. He currently serves as a director of ZIBEX, Inc.
Timothy M. Hurd (31), Director and Vice President of the Company since December
1999. Mr. Hurd is a director of Madison Dearborn Partners. Prior to joining
Madison Dearborn Partners in 1995, Mr. Hurd was with Goldman Sachs & Co. from
1992 to 1994. He currently serves as a director of CapitalSource LLC,
PeopleFirst.com, Pax Clearing Company and PayPal Inc.
Scott P. Marks, Jr. (55), Director of the Company since January 2000. Mr. Marks
is a private investor in Chicago, IL. Mr. Marks resigned from his post as Vice
Chairman and a member of the Board of Directors of First Chicago NBD Corporation
in December 1997, a post he had held since December 1995. Previously he was
Executive Vice President of First Chicago Corporation and managed their credit
card business for approximately 10 years. Mr. Marks serves as a director of ADA
Business Enterprises, the for-profit subsidiary of the American Dental
Association and Clark Polk Land LLC.
Richard L. Thomas (70), Director of the Company since January 2000. Mr. Thomas
has been retired since May 1996. Prior to retiring, Mr. Thomas served as
Chairman of First Chicago NBD Corporation from December 1995 to May 1996. Prior
to that he served as Chairman of First Chicago Corporation from December 1991 to
December 1995. He currently serves as a director of Exelon, IMC Global Inc., The
PMI Group Inc., The Sabre Holding Corp. and Sara Lee Corporation.
Paul R. Wood (47), Director and Vice President of the Company since December
1999. Mr. Wood is a managing director of Madison Dearborn Partners. Prior to
co-founding Madison Dearborn Partners in 1993, Mr. Wood was with First Chicago
Venture Capital for nine years in various leadership positions. He currently
serves as a director of Hines Horticulture, Inc., Woods Equipment Company, Inc.
and Eldorado Bankshares, Inc.
Michael A. DiMarco (43), Executive Vice President - President of Specialty
Business since January 2001; Executive Vice President and President Collection
Services of the Company from September 1998 until December 2000. From 1991 until
September 1998, Mr. DiMarco was with Paging Network, Inc., a wireless
communications provider, serving in various leadership positions including
Senior Vice President of Operations and Executive Vice President of Sales. Prior
to that, he served in various senior leadership positions with the City of New
York, Hertz Rent-A-Car, Inc., ARA Services, Inc. and National Car Rental, Inc.
Bryan K. Faliero (35), Executive Vice President Operations - President of
Portfolio Services since January 2001; President Portfolio Services of the
Company from October 1997 until December 2000. From June 1997 to September 1997,
Mr. Faliero served as Vice President, Business Analysis for the Company. Prior
to joining the Company, he was an associate with Booz Allen & Hamilton, a
strategic consulting company based in Chicago, concentrating on operations
strategy and network rationalization.
Michael B. Staed (54), Executive Vice President Sales - Chief Sales and
Marketing Officer since January 2001; Senior Vice President and President
Outsourcing Services of the Company from July 1999 until December 2000. From May
1998 to June 1999, Mr. Staed served as Senior Vice President Marketing,
Outsourcing for the Company. Prior to joining the Company, he served as a
partner in the consulting division of Ernst & Young LLP for four years focusing
on the global telecommunications practice.
Gary L. Weller (40), Executive Vice President and Chief Financial Officer of the
Company since July 1999. From January 1998 to June 1999, Mr. Weller served as
Senior Vice President and Chief Financial Officer of Harbour Group Ltd., an
investment firm based in St. Louis. From June 1993 to December 1997, he served
as Executive Vice President and Chief Financial Officer of Greenfield
Industries, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued for by the Company on behalf of the Company's Chief Executive Officer
and the four other most highly compensated executive officers of the Company
(collectively, the "Named Officers") for the years ended December 31, 2000, 1999
and 1998.
Summary Compensation Table
----------------------------------------------------------------
Long Term
Compensation
Other Annual Awards All Other
Name and Salary Bonus Compensation ------------ Compensation
Principal Position Year ($) ($) ($) Options (#) ($)(1)
- ------------------ ----- ------- ------- ------------ ------------ ------------
Timothy G. Beffa 2000 371,250 375,000 30,000 3,400
President and CEO 1999 370,836 365,000 2,617
1998 350,000 405,300
Michael A. DiMarco 2000 319,370 105,000 3,000 3,400
Executive Vice 1999 325,000 100,000 42,373(2) 50,000 1,373,017
President - President 1998(3) 108,337 220,000 14,491(2)
of Specialty Business
Bryan K. Faliero 2000 241,673 105,000 31,250 3,400
Executive Vice 1999 195,206 90,000 480,337
President Operations- 1998 159,373 83,800 4,272
President of
Portfolio Services
Mike B. Staed 2000 245,519 70,000 19,663 3,400
Executive Vice 1999 228,337 70,000 16,000 947,505
President Sales - 1998(4) 135,289 89,600 9,000
Chief Sales and
Marketing Officer
Gary L. Weller 2000 269,884 120,000
Executive Vice 1999(5) 134,512 310,000 50,000 10,459
President and CFO
(1) Amounts for 2000 represent the Company's portion of the 401(k) Plan
contribution. In connection with the Recapitalization in 1999, Mr. DiMarco,
Mr. Faliero and Mr. Staed received change in control payments of
$1,356,875, $475,627 and $937,500, respectively. Remaining amounts in 1999
and 1998, if any, represent split dollar life insurance and long-term
disability premiums paid by the Company along with the Company's portion of
the 401(k) Plan contribution.
(2) Payment of taxes by the Company for includable W-2 relocation expenses.
(3) 1998 compensation based on an annual salary of $325,000. Mr. DiMarco was
hired in September 1998.
(4) 1998 compensation based on an annual salary of $210,000. Mr. Staed was
hired in May 1998.
(5) 1999 compensation based on an annual salary of $275,000. Mr. Weller was
hired in July 1999.
The following table sets forth grants of stock options to the Named
Officers during the year ended December 31, 2000.
OPTION GRANTS IN 2000
Percent of Potential Realizable Value
Number of Total at Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise or for Option Term
Options Employees In Base Price Expiration ---------------------------
Name Granted (#) Fiscal Year ($/share) Date 5% 10%
- ----------------- ----------- ------------ ----------- ------------- -------- -------------
Timothy G. Beffa 30,000 10.1% $37.47 June 29, 2010 $706,800 $1,791,600
Michael A. DiMarco 3,000 1.0% $37.47 June 29, 2010 $70,680 $179,160
Bryan K. Faliero 31,250 10.5% $37.47 June 29, 2010 $736,250 $1,866,250
Mike B. Staed 19,663 6.6% $37.47 June 29, 2010 $463,260 $1,174,274
During the year ended December 31, 2000, there were no stock option
exercises by the Named Officers. The following table sets forth options held by
the Named Officers at December 31, 2000.
AGGREGATED OPTION VALUES ON
DECEMBER 31, 2000
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 2000 December 31, 2000(1)
--------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- ------------- ----------- -------------
Timothy G. Beffa 70,175 30,000 $1,752,270 0
Michael A. DiMarco 50,000 3,000 0 0
Bryan K. Faliero 18,750 31,250 $233,813 0
Michael B. Staed 25,000 19,663 0 0
Gary L. Weller 50,000 0 0 0
(1) Based on the price per share of $37.47, the last price at which the Company
sold its Voting common stock.
Employment Agreements
OSI has entered into employment agreements with certain officers, including
each of the named executive officers. The employment agreements provide for
initial base salaries for Messrs. Beffa, DiMarco, Faliero, Staed and Weller of
$375,000, $325,000, $210,000, $250,000 and $275,000, respectively. Base salaries
are adjusted annually by the Compensation Committee of the Board of Directors.
In addition, the agreements provide that Mr. Beffa is eligible for an annual
bonus of up to 150% of his annual base salary and Messrs. DiMarco, Faliero,
Staed and Weller are eligible for target annual bonuses of 67%, 50%, 50% and
67%, respectively.
On December 31 of each year, the term of each employment agreement is
automatically extended for an additional year unless the Company or the officer
gives 30 days advance termination notice. If (i) the Company terminates the
officer's employment without "cause" (as defined in the employment agreement),
(ii) the Company does not agree to extend the employment agreement upon the
expiration thereof, (iii) the officer terminates his employment because the
Company reduces his responsibilities or compensation in a manner which is
tantamount to termination of the officer's employment, or (iv) within two years
following a sale of the company (as defined in the employment agreement), the
officer resigns for "good reason" (as defined in the employment agreement), the
officer would be entitled to receive an amount equal to his total cash
compensation (base salary plus bonus, excluding, however, any change of control
bonus described below) for the preceding year and continue to receive medical
and dental health benefits for one year. If the officer's employment is
terminated by the Company "for cause", the officer is not be entitled to
severance compensation.
The employment agreements for Messrs. DiMarco, Faliero and Staed provide
that upon consummation of a sale of the Company (as defined in the employment
agreement), if the officer is employed by the Company immediately prior thereto,
he will be entitled to receive a payment from the Company in the amount of 250%
of his (i) then current base salary plus (ii) target annual bonus, reduced by
any gain for all of the options to purchase capital stock of the Company or
other equity compensation awards previously granted to the officer. Pursuant to
this provision, Messrs. DiMarco, Faliero and Staed received change in control
bonuses in 1999 upon consummation of the Recapitalization. The change in control
bonuses paid in 1999 and any future bonuses paid pursuant to this provision of
the employment agreements will be paid only if such bonus is previously approved
by a vote of more than seventy-five percent (75%) of the voting power of the
Company's outstanding stock immediately before any sale of the Company.
Director Compensation
Messrs. Hewitt, Marks and Thomas receive $2,000 per regularly scheduled
meeting of the Board of Directors, $1,000 per special meeting of the Board of
Directors and $500 per committee meeting. Effective May 31, 2000, Messrs.
Hewitt, Marks and Thomas each purchased 2,669 shares of the Company's voting
common stock for fair value, $37.47 per share. In conjunction with this stock
purchase, each was granted an option to purchase an additional 2,669 shares of
the Company's voting common stock at an exercise price of $37.47 per share.
These options time-vest over a three-year period and expire on the earlier of
May 31, 2010 or the date the director ceases to be a member of the Company's
Board of Directors.
All directors receive reimbursement for travel and out-of-pocket expenses
incurred in connection with attendance at all such meetings. Except as described
above, no director of OSI receives any other compensation from OSI for
performance of services as a director of OSI or a member of any committee of the
Board of Directors.
Option Plans
The Company maintains the 1995 Stock Option and Stock Award Plan ("1995
Plan") and Outsourcing Solutions Inc. 2000 Equity Incentive Plan ("2000 Plan")
(collectively, the "Stock Option Plans"). The Stock Option Plans are
administered by the Compensation Committee of the Board of Directors of the
Company. Under the Stock Option Plans, the Compensation Committee may grant or
award (i) options to purchase stock of the Company, (ii) stock appreciation
rights granted in conjunction with stock options, (iii) restricted stock, or
(iv) bonuses payable in stock, to key salaried employees of the Company,
including officers, independent contractors of the Company and directors of the
Company. Options granted under the 1995 Plan may either be incentive stock
options ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, or stock options other than ISOs ("NQSOs"), but all grants
under the 1995 Plan were NQSOs. The 2000 Plan authorizes the issuance of only
NQSOs.
A total of 1,150,000 shares of common stock of the Company are reserved for
issuance under the Stock Option Plans. As of March 29, 2001, options to purchase
up to 705,345 shares of the Company's common stock are outstanding under the
Stock Option Plans, which 399,925 shares are vested and exercisable.
Compensation Committee Interlocks and Insider Participation
Mr. Hurd serves as a member of the Company's Compensation Committee and as
a Vice President of the Company. Mr. Hurd is not, however, an employee of the
Company.
Board of Directors' Report on Executive Compensation
The Compensation Committee recommends compensation arrangements for the
Company's executive officers and administers the Company's Stock Option Plans.
The Company's compensation program was designed to be competitive with companies
similar in structure and business to the Company.
The Company's executive compensation program was structured to help the
Company achieve its business objectives by:
o Setting levels of compensation designed to attract and retain superior
executives in a highly competitive environment.
o Designing equity-related and other performance-based incentive compensation
programs to align the interests of management with the ongoing interests of
shareholders; and
o Providing incentive compensation that varies directly with both Company
financial performance and individual contributions to that performance.
The Company has used a combination of salary and incentive compensation,
including cash bonuses and equity-based incentives to achieve its compensation
goals. In accordance with the 2000 Management Incentive Plan, effective in April
2000, the Company selected executives and certain managers and other key
personnel to participate in the annual bonus program. It established target
awards for each participant, as a percent of his or her base salary. In
addition, corporate and individual business unit objectives were established for
revenue and adjusted earnings before interest, taxes, depreciation and
amortization ("EBITDA") and corporate leverage. These financial factors, along
with a component for accomplishment of individual goals, were assigned a
weighting for each participant, depending on his or her position within the
Company.
In February 2001, the head of each functional unit recommended the amount
of payout for individual performance based on an evaluation of each
participant's performance in 2000. Recommendations for the individual
performance component were reviewed and in some cases adjusted by the Chief
Executive Officer. Payout for revenue, EBITDA and leverage were determined based
on the Company's financial results for the year ended December 31, 2000. The
total amount of bonus payouts and individual payouts for each of the Company's
senior executives were presented to and approved by the Compensation Committee.
In June 1999, the Company entered into an amended and restated employment
agreement with Timothy G. Beffa to serve as President and Chief Executive
Officer of OSI. Under the employment agreement, Mr. Beffa's base salary for 1999
was $375,000 and his bonus target potential was $562,500, 150% of his base
salary. In March 2000, the Compensation Committee increased Mr. Beffa's base
salary to $390,000 and his target potential to $585,000, 150% of base salary.
These amounts were established by the Compensation Committee after consideration
of compensation paid to Chief Executive Officers of comparative companies and
the relationship of his compensation to that paid to other OSI senior
executives. For 2000, Mr. Beffa's bonus was determined based upon the following
three factors, which were weighted as indicated: the Company's performance
against pre-established revenue and EBITDA goals (70%), leverage goals (15%) and
Mr. Beffa's attainment of pre-established objectives, based on specific
strategic initiatives to both build a suitable business infrastructure and
deliver on strategic growth initiatives (15%). Based on the Company's revenue
and EBITDA performance, year-end leverage and Mr. Beffa's substantial obtainment
of personal objectives, Mr. Beffa's bonus for 2000 was $375,000--64.1% of his
target bonus.
Compensation Committee
Timothy M. Hurd
Paul R. Wood
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 29, 2001, the authorized capital stock of the Company consists
of (i) 15,000,000 shares of Voting Common Stock, par value $.01 per share, of
which 6,088,479.30 are issued and outstanding, (ii) 2,000,000 shares of
Non-Voting Common Stock, par value $.01 per share, of which 480,321.30 are
issued and outstanding, (iii) 200,000 shares of 14% Mandatorily Redeemable
Senior Preferred Stock, no par value, of which 100,000 are issued and
outstanding and (iv) 50,000 shares of Junior Preferred Stock, no par value, of
which 7,000 are issued and outstanding.
The following table sets forth the number and percentage of shares of each
class of the Company's capital stock beneficially owned as of March 29, 2001 by
(i) each person known to the Company to be the beneficial owner of more than 5%
of any class of the Company's voting equity securities, (ii) each of the
Company's directors and nominees, (iii) each of the Named Officers, and (iv) all
directors and executive officers of the Company as a group.
Amount and
Nature of Percent
Beneficial of Class
Title of Class Name and Address Beneficial Owner Ownership (1)
- -------------------- --------------------------------- ------------ --------
Voting Common Stock Madison Dearborn Capital Partners 4,536,367.84 74.5%
III, L.P.(2)
Madison Dearborn Special Equity 4,536,367.84 74.5%
III, L.P. (2)
Special Advisors Fund I, L.L.C. 4,536,367.84 74.5%
(2)
Timothy M. Hurd (2) 4,536,367.84 74.5%
Paul R. Wood (2) 4,536,367.84 74.5%
Timothy G. Beffa (3) 96,863.02 1.5%
Michael A. DiMarco (3) 57,000.00 *
Bryan K. Faliero (3) 28,758.00 *
Michael B. Staed (3) 30,337.60 *
Gary L. Weller (3) 63,344.01 1.0%
All directors and executive 4,812,670.47 76.4%
officers as a group
Junior Preferred Timothy G. Beffa 81.65 1.2%
Stock Bryan K. Faliero 2.48 *
All directors and executive 84.13 1.2%
officers as a group
* Represents less than one percent.
(1) The information as to beneficial ownership is based on statements furnished
to the Company by the beneficial owners. As used in this table, "beneficial
ownership" means the sole or shared power to vote, or direct the voting of
a security, or the sole or shared investment power with respect to a
security (i.e., the power to dispose of, or direct the disposition of a
security). A person is deemed as of any date to have "beneficial ownership"
of any security that such person has the right to acquire within 60 days
after such date. For purposes of computing the percentage of outstanding
shares held by each person named above, any security that such person has
the right to acquire within 60 days of the date of calculation is deemed to
be outstanding, but is not deemed to be outstanding for purposes of
computing the percentage ownership of any other person.
(2) Includes 4,433,913.11 shares owned by Madison Dearborn Capital Partners
III, L.P., 98,452.05 shares owned by Madison Dearborn Special Equity III,
L.P. and 4,002.68 shares owned by Special Advisors Fund I, L.L.C. with each
entity managed by or affiliated with Madison Dearborn Partners, LLC.
Messrs. Hurd and Wood are managing directors of Madison Dearborn Partners,
LLC. Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special
Equity III, L.P. and Special Advisors Fund I, L.L.C. have pledged their
shares of the Company's common stock as security under the Company's Credit
Agreement. In addition, under the Stockholders Agreement, dated as of
December 10, 1999, among the Company and substantially all of the Company's
stockholders, Madison Dearborn Capital Partners III, L.P., as principal
investor, may designate individuals to serve as directors of the Company.
The Stockholders Agreement also includes restrictions on the transfer of
capital stock, and provides for registration, preemptive, tag along and
drag along rights granted to the parties thereto, including Madison
Dearborn Capital Partners III, L.P. and certain of its affiliates. The
address of all the above-mentioned entities is c/o Madison Dearborn
Partners, LLC, 3 First National Plaza, Suite 3800, Chicago, IL 60602.
(3) Includes vested options to acquire the following number of shares of the
Company's common stock: Mr. Beffa 70,175; Mr. DiMarco 50,000; Mr. Faliero
18,750; Mr. Staed 25,000 and Mr. Weller 50,000. The address of Messrs.
Beffa, DiMarco, Staed and Weller is c/o Outsourcing Solutions Inc., 390
South Woods Mill Rd., Suite 350, Chesterfield, MO 63017. Mr. Faliero's
address is c/o OSI Portfolio Services, Inc., 2425 Commerce Ave., Building
2100, Suite 100, Duluth, GA 30096.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Advisory Services Agreement
On September 21, 1995 the Company entered into an Advisory Services
Agreement (the "Advisory Services Agreement") with MDC Management Company III,
L.P. ("MDC Management"), then an affiliate. Under the Advisory Services
Agreement, the Company received consulting, financial, and managerial functions
for a $300,000 annual fee. On December 10, 1999, in conjunction with the
Recapitalization, the Advisory Services Agreement was amended and assigned to
Madison Dearborn Partners, Inc. ("MDP"). As amended, the annual fee under the
Advisory Services Agreement is $500,000. The Advisory Services Agreement expires
September 21, 2005 and is renewable annually thereafter, unless terminated by
the Company. The Company may terminate the Advisory Services Agreement at any
time for cause by written notice to MDP authorized by a majority of the
directors other than those who are partners, principals or employees of MDP or
any of its affiliates. The Advisory Services Agreement may be amended by written
agreement of MDP and the Company. The Company believes that the terms of and
fees paid for the professional services rendered are at least as favorable to
the Company as those which could be negotiated with a third party. In 2000, the
Company expensed $500,000 under the Advisory Services Agreement for MDP's
professional services.
Consulting Agreements
On January 26, 1998, the Company entered into a one-year Consulting
Agreement with William B. Hewitt, a director of the Company. Under the original
Consulting Agreement, Mr. Hewitt provided consulting assistance with the growing
outsourcing services of the Company at 80% of normal working hours. In addition,
Mr. Hewitt received options to purchase 10,000 shares of common stock of the
Company, which options in accordance with their terms became vested and
exercisable upon consummation of the Recapitalization. On January 25, 1999, the
Consulting Agreement was extended through March 31, 1999 and at the same time
the Consulting Agreement was renewed for the period April 1, 1999 through March
31, 2000, with the consulting services reduced to a maximum of 50 days
(approximately 20% of normal working hours). Beginning April 1, 2000, Mr. Hewitt
agreed to perform consulting services as mutually agreed from time to time. For
the year ended December 31, 2000, the Company paid Mr. Hewitt $80,000 for
consulting services.
Indebtedness of Management
During 2000, the Company issued 26,688.02, 10,008 and 13,344.01 shares of
its voting common stock at fair value to Messrs. Beffa, Faliero and Weller,
respectively in exchange for cash and interest bearing notes secured by the
shares along with certain personal assets. At December 31, 2000, the outstanding
indebtedness under the notes for Messrs. Beffa, Faliero and Weller was
approximately $1,030,000, $375,000 and $412,000, respectively, which includes
the outstanding principal balance and interest. The interest rate on Mr. Beffa's
and Mr. Weller's note is 6.71% per annum and on Mr. Faliero's note, the interest
rate is 6.01% per annum.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See index on page 42 for a listing of consolidated financial statements
filed with this report.
2. Financial Statement Schedule
See index on page 42 for a listing of consolidated financial statements
schedule required to be filed by Item 8 of this Form 10-K.
3. Exhibits
Exhibit No.
2.1 Stock Subscription and Redemption Agreement by and among Madison
Dearborn Capital Partners III, L.P., the Company and certain
stockholders, optionholders and warrantholders of the Company, dated as
of October 8, 1999, as amended (incorporated herein by reference to
Exhibit 2 of the Company's Current Report on Form 8-K filed on December
23, 1999).
2.2 Assignment and Stock Purchase Agreement dated as of December 10, 1999
by and among Outsourcing Solutions Inc., Madison Dearborn Capital
Partners III, L.P., and certain other parties thereto (incorporated
herein by reference to Exhibit 2.5 of the Company's Form 10-K for the
period ended December 31, 1999).
2.3 Purchase Agreement dated as of December 10, 1999, by and among
Outsourcing Solutions Inc. and certain other parties thereto
(incorporated herein by reference to Exhibit 2.6 of the Company's Form
10-K for the period ended December 31, 1999).
2.4 Junior Preferred Stock Purchase Agreement, dated as of December 10,
1999, by and among Outsourcing Solutions Inc. and certain other parties
thereto (incorporated herein by reference to Exhibit 2.7 of the
Company's Form 10-K for the period ended December 31, 1999).
2.5 Consent Solicitation Statement, dated November 9, 1999, relating to the
Company's 11% Senior Subordinated Notes due November 1, 2006
(incorporated herein by reference to Exhibit 2.8 of the Company's Form
10-K for the period ended December 31, 1999).
2.6 Asset Purchase Agreement dated September 26, 2000 by and among
Outsourcing Solutions Inc., RWC Consulting Group, LLC, RWC Consulting
Group, Inc., and Robert W. Curtis, Jr. (incorporated herein by
reference to Exhibit 2 of the Company's Form 10-Q for the period ended
September 30, 2000).
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Company, as of December 3, 1999 (incorporated herein by reference to
Exhibit 3.1 of the Company's Form 10-K for the year ended December 31,
1999).
3.2 By-laws of the Company.
4.1 Indenture dated as of November 6, 1996 by and among the Company, the
Guarantors and Wilmington Trust Company (the "Indenture") (incorporated
herein by reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-4 filed on November 26, 1996).
4.2 Specimen Certificate of 11% Senior Subordinated Note due 2006 (included
in Exhibit 4.1 hereto) (incorporated herein by reference to Exhibit 4.2
of the Company's Registration Statement on Form S-4 filed on November
26, 1996).
4.3 Specimen Certificate of 11% Series B Senior Subordinated Note due 2006
(the "New Notes") (included in Exhibit 4.1 hereto) (incorporated herein
by reference to Exhibit 4.3 of the Company's Registration Statement on
Form S-4 filed on November 26, 1996).
4.4 Form of Guarantee of securities issued pursuant to the Indenture
(included in Exhibit 4.1 hereto) (incorporated herein by reference to
Exhibit 4.4 of the Company's Registration Statement on Form S-4 filed
on November 26, 1996).
4.5 First Supplemental Indenture dated as of March 31, 1998 by and among
the Company, the Additional Guarantors and Wilmington Trust Company
(incorporated herein by reference to Exhibit 4.5 of the Company's Form
10-K for the year ended December 31, 1998).
4.6 Second Supplemental Indenture dated as of July 16, 2000 by and among
the Company, the Additional Guarantors and Wilmington Trust Company, as
trustee (incorporated herein by reference to Exhibit 4.1 of the
Company's Form 10-Q for the period ended September 30, 2000).
4.7 Third Supplemental Indenture dated as of September 29, 2000 by and
among the Company, the Additional Guarantors and Wilmington Trust
Company, as trustee (incorporated herein by reference to Exhibit 4.2 of
the Company's Form 10-Q for the period ended September 30, 2000).
4.8 Release of Subsidiary Guarantee of OSI Education Services, Inc.
(incorporated herein by reference to Exhibit 4.3 of the Company's Form
10-Q for the period ended September 30, 2000).
10.1 Stockholders Agreement dated as of December 10, 1999 by and among the
Company and various stockholders of the Company (incorporated herein by
reference to Exhibit 10 of the Company's Current Report on Form 8-K
filed on December 23, 1999).
10.2 Advisory Services Agreement dated September 21, 1995 between the
Company and Madison Dearborn Partners, Inc., as assignee from MDC
Management Company III, L.P. as amended by Assignment Agreement dated
as of December 10, 1999 by and between Madison Dearborn Partners, Inc.,
the Company and MDC Management Company III, L.P. (incorporated herein
by reference to Exhibit 10.2 of the Company's Form 10-K for the period
ended December 31, 1999).
10.3 Registration Rights Agreement dated December 10, 1999, by and among
Outsourcing Solutions Inc., Madison Dearborn Partners III, L.P. and
certain other parties thereto (incorporated herein by reference to
Exhibit 10.3 of the Company's Form 10-K for the period ended December
31, 1999).
10.4 Registration Rights Agreement dated December 10, 1999, by and among the
Company and certain other parties thereto (incorporated herein by
reference to Exhibit 10.4 of the Company's Form 10-K for the period
ended December 31, 1999).
10.5 Amended and Restated Employment Agreement dated as of June 4, 1999
between the Company and Timothy G. Beffa (incorporated herein by
reference to Exhibit 10.5 of the Company's Form 10-K for the period
ended December 31, 1999).
10.6 Amended and Restated Employment Agreement dated as of June 4, 1999
between the Company and Michael A. DiMarco (incorporated herein by
reference to Exhibit 10.6 of the Company's Form 10-K for the period
ended December 31, 1999).
10.7 Employment Agreement dated as of June 4, 1999 between the Company and
Bryan K. Faliero (incorporated herein by reference to Exhibit 10.7 of
the Company's Form 10-K for the period ended December 31, 1999).
10.8 Amended and Restated Employment Agreement dated as of June 4, 1999
between the Company and Michael B. Staed (incorporated herein by
reference to Exhibit 10.8 of the Company's Form 10-K for the period
ended December 31, 1999).
10.9 Employment Agreement dated July 5, 1999 between the Company and Gary L.
Weller (incorporated herein by reference to Exhibit 10.9 of the
Company's Form 10-K for the period ended December 31, 1999).
10.10 Consulting Agreement dated as of February 6, 1998 between the Company
and William B. Hewitt as amended January 25, 1999 (incorporated herein
by reference to Exhibit 10.6 of the Company's Form 10-K for the year
ended December 31, 1998).
10.11 1995 Stock Option and Stock Award Plan of the Company (incorporated
herein by reference to Exhibit 10.31 of the Company's Registration
Statement on Form S-4 filed on November 26, 1996).
10.12 First Amendment to 1995 Stock Option and Stock Award Plan of the
Company (incorporated herein by reference to Exhibit 10.13 of the
Company's Form 10-K for the year ended December 31, 1997).
10.13 Form of Non-Qualified Stock Option Award Agreement [B], as amended
(incorporated herein by reference to Exhibit 10.14 of the Company's
Form 10-K for the period ended December 31, 1999).
10.14 Form of Non-Qualified Stock Option Award Agreement [C], as amended
(incorporated herein by reference to Exhibit 10.15 of the Company's
Form 10-K for the period ended December 31, 1999).
10.15 Form of Non-Qualified Stock Option Award Agreement [E] (incorporated
herein by reference to Exhibit 10.15 of the Company's Form 10-K for the
period ended December 31, 1999).
10.16 Outsourcing Solutions Inc. 2000 Equity Incentive Plan.
10.17 Form of Non-Qualified Stock Purchase and Option Award Agreement [F]
(incorporated herein by reference to Exhibit 10.4 of the Company's Form
10-Q for the period ended June 30, 2000).
10.18 Form of Director Stock Purchase and Option Agreement (incorporated
herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the
period ended June 30, 2000).
10.19 Management Stock Purchase Agreement, Non-Recourse Secured Promissory
Note and Management Stock Pledge Agreement dated as of April 19, 2000
between the Company and Timothy Beffa (incorporated herein by reference
to Exhibit 10.1 of the Company's Form 10-Q for the period ended June
30, 2000).
10.20 Management Stock Purchase Agreement, Promissory Note and Management
Stock Pledge Agreement dated as of April 19, 2000 between the Company
and Gary Weller (incorporated herein by reference to Exhibit 10.2 of
the Company's Form 10-Q for the period ended June 30, 2000).
10.21 Management Stock Purchase Agreement, Promissory Note and Management
Stock Pledge Agreement dated as of November 1, 2000 between the Company
and Bryan Faliero.
10.22 2000 Management Incentive Plan.
10.23 Outsourcing Solutions Inc. Deferred Compensation Plan.
10.24 Earn-out Agreement dated October 8, 1997 by and among NSA Acquisition
Corporation, Outsourcing Solutions Inc., North Shore Agency, Inc.,
Automated Mailing Services, Inc., Mailguard Security Systems, Inc.,
and DMM Consultants (incorporated herein by reference to Exhibit 10.17
of the Company's Form 10-K for the year ended December 31,1997).
10.25 Credit Agreement dated as of November 30, 1999 among the Company, the
Lenders listed therein, DLJ Capital Funding, Inc., as the Syndication
Agent, and Fleet National Bank, as the Administrative Agent
(incorporated herein by reference to Exhibit 10.18 of the Company's
Form 10-K for the year ended December 31, 1999).
16 Letter from Deloitte & Touche LLP dated June 29, 2000 (incorporated
herein by reference to Exhibit 16.1 of the Company's Current Report on
Form 8-K filed on June 30, 2000).
21 Subsidiaries of registrant.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three-month period ended December 31,
2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
OUTSOURCING SOLUTIONS INC.
/s/Timothy G. Beffa
------------------------------------
Timothy G. Beffa
President and Chief Executive Officer
/s/Gary L. Weller
------------------------------------
Gary L. Weller
Executive Vice President and
Chief Financial Officer
DATE: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/Timothy G. Beffa President and Chief Executive March 22, 2001
- ------------------------ Officer, Director
Timothy G. Beffa
/s/William B. Hewitt Director March 21, 2001
- ------------------------
William B. Hewitt
/s/Timothy M. Hurd Director and Vice President March 19, 2001
- ------------------------
Timothy M. Hurd
/s/Scott P. Marks, Jr. Director March 21, 2001
- ------------------------
Scott P. Marks, Jr.
/s/Richard L. Thomas Director March 19, 2001
- ------------------------
Richard L. Thomas
/s/Paul R. Wood Director and Vice President March 28, 2001
- ------------------------
Paul R. Wood
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL
STATEMENT SCHEDULE
Page
Consolidated Financial Statements
Outsourcing Solutions Inc. and Subsidiaries
Reports of Independent Accountants............................... F-1
Consolidated Balance Sheets at December 31, 2000 and 1999........ F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998............................. F-4
Consolidated Statements of Stockholders' Deficit for the years
ended December 31, 2000, 1999 and 1998....................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998............................. F-6
Notes to Consolidated Financial Statements....................... F-8
Consolidated Financial Statement Schedule
Report of Independent Accountants.................................... F-27
Schedule II - Valuation and Qualifying Accounts and Reserves......... F-28
Report of Independent Accountants
To the Stockholders of Outsourcing Solutions Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 37 present fairly, in all material
respects, the financial position of Outsourcing Solutions Inc. and its
subsidiaries at December 31, 2000, and the results of their operations and their
cash flows for the year ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the index appearing
under Item 14(a)(2) on page 37 present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. The
consolidated financial statements of the Company as of December 31, 1999 and for
the years ended December 31, 1999 and 1998 were audited by other independent
accountants whose report dated March 28, 2000 expressed an unqualified opinion
on those statements.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 2, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Outsourcing Solutions Inc.:
We have audited the accompanying consolidated balance sheet of Outsourcing
Solutions Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' (deficit) and cash flows
for each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Outsourcing Solutions Inc. and
subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
- -----------------------
Deloitte & Touche LLP
St. Louis, Missouri
March 28, 2000
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
Cash and cash equivalents $ 10,273 $ 6,059
Cash and cash equivalents held for clients 21,970 22,521
Accounts receivable - trade, less allowance for
doubtful receivables of $447 and $529 62,876 52,082
Purchased loans and accounts receivable portfolios 24,690 39,947
Property and equipment, net 46,601 43,647
Intangible assets, net 417,084 410,471
Deferred financing costs, less accumulated
amortization of $4,538 and $248 22,934 27,224
Other assets 30,426 22,761
-------- --------
TOTAL $636,854 $624,712
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable - trade $ 14,446 $ 6,801
Collections due to clients 21,970 22,521
Accrued salaries, wages and benefits 15,195 17,009
Debt 539,463 518,307
Other liabilities 71,080 68,306
Commitments and contingencies (Notes 2, 7 and 13) - -
Mandatorily redeemable preferred stock; redemption
amount $123,115 and $107,877 103,455 85,716
Stockholders deficit:
Voting common stock; $.01 par value; authorized
15,000,000 shares, 9,166,728.37 and
9,054,638.11 shares, respectively, issued 92 90
Non-voting common stock; $.01 par value;
authorized 2,000,000 shares, 480,321.30
issued and outstanding 5 5
Paid-in capital 200,537 196,339
Accumulated deficit (192,715) (155,525)
-------- --------
7,919 40,909
Notes receivable from management for shares sold (1,817) -
Common stock in treasury, at cost; 3,078,249.07 shares (134,857) (134,857)
-------- --------
Total stockholders' deficit (128,755) (93,948)
-------- --------
TOTAL $636,854 $624,712
======== ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
REVENUES $542,627 $504,425 $479,400
EXPENSES:
Salaries and benefits 264,293 244,157 230,114
Service fees and other operating
and administrative expenses 173,351 154,799 140,888
Amortization of purchased loans
and accounts receivable portfolios 28,092 38,722 50,703
Amortization of goodwill and other intangibles 16,082 16,229 15,725
Depreciation expense 15,803 14,866 14,282
Compensation expense related to redemption of
stock options 187 - -
Nonrecurring conversion, realignment and
relocation expenses 2,742 5,063 -
Change in control bonuses, stock option
redemption and other bonuses - 10,487 -
Recapitalization related costs - 6,827 -
-------- -------- --------
Total expenses 500,550 491,150 451,712
-------- -------- --------
OPERATING INCOME 42,077 13,275 27,688
INTEREST EXPENSE - Net 60,934 52,265 50,627
-------- -------- --------
LOSS BEFORE INCOME TAXES, MINORITY INTEREST
AND EXTRAORDINARY ITEM (18,857) (38,990) (22,939)
PROVISION FOR INCOME TAXES 594 759 830
MINORITY INTEREST - - 572
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM (19,451) (39,749) (24,341)
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT - 4,208 -
-------- -------- --------
NET LOSS (19,451) (43,957) (24,341)
PREFERRED STOCK DIVIDEND REQUIREMENTS AND
ACCRETION OF SENIOR PREFERRED STOCK 17,739 2,358 681
-------- -------- --------
NET LOSS TO COMMON STOCKHOLDERS $(37,190) $(46,315) $(25,022)
======== ======== ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands, except share and per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
Non-voting Common Stock
Cumulative ------------------------------
Redeemable Non-voting
Preferred Classes Paid-in Accumulated Notes Treasury
Stock Voting Non-voting A,B&C Capital Deficit Receivable Stock Total
---------- ------ ---------- ---------- ------- ----------- ---------- -------- -------
BALANCE, JANUARY 1, 1998 $11,699 $ 35 $ - $ 18 $ 66,958 $ (84,188) $ - $ - $ (5,478)
Payment of preferred stock
dividends through issuance
of 37,435.47 shares of
preferred stock and recorded
preferred stock dividend
requirements of $1 per share 468 - - - - (681) - - (213)
Net loss - - - - - (24,341) - - (24,341)
------- ---- ---- ----- -------- --------- ------- --------- ---------
BALANCE, DECEMBER 31, 1998 12,167 35 - 18 66,958 (109,210) - - (30,032)
Payment of preferred stock
dividends through issuance
of 140,997.01 shares of
preferred stock and recorded
preferred stock dividend
requirements of $1 per share 1,762 - - - - (1,276) - - 486
Issuance of 186,791.67 common
shares in exchange for MDP's
investment in FINCO - 2 - - 6,998 - - - 7,000
Issuance of 5,273,037.98
voting and 480,321.30
non-voting common shares - 52 5 - 215,546 - - - 215,603
Repurchase of common stock and
redemption of preferred,
non-voting common, stock
options and warrants (13,929) 1 - (18) (93,163) - - (115,391) (222,500)
Recapitalization fees and
expenses - - - - - - - (19,466) (19,466)
Accrued dividends on mandatorily
redeemable preferred stock - - - - - (877) - - (877)
Accretion of mandatorily
redeemable preferred stock - - - - - (205) - - (205)
Net loss - - - - - (43,957) - - (43,957)
------- ---- ---- ----- -------- --------- ------- --------- ---------
BALANCE, DECEMBER 31, 1999 - 90 5 - 196,339 (155,525) - (134,857) (93,948)
Issuance of 62,050.23
voting common shares - 1 - - 2,324 - - - 2,325
Issuance of 50,040.03 voting
common shares in exchange
for cash and notes receivable - 1 - - 1,874 - (1,774) - 101
Accrued interest on
notes receivable - - - - - - (43) - (43)
Accrued dividends on
mandatorily redeemable
preferred stock - - - - - (15,238) - - (15,238)
Accretion of mandatorily
redeemable preferred stock - - - - - (2,501) - - (2,501)
Net loss - - - - - (19,451) - - (19,451)
------- ---- ---- ----- -------- --------- ------- --------- ---------
BALANCE, DECEMBER 31, 2000 $ - $ 92 $ 5 $ - $200,537 $(192,715) $(1,817) $(134,857) $(128,755)
======= ==== ==== ===== ======== ========= ======= ========= =========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES AND PORTFOLIO PURCHASING:
Net loss $(19,451) $(43,957) $(24,341)
Adjustments to reconcile net loss to net cash
from operating activities and portfolio
purchasing:
Depreciation and amortization 36,300 34,477 32,833
Amortization of purchased loans and
accounts receivable portfolios 28,092 38,722 50,703
Extraordinary loss on extinguishment
of debt - 4,208 -
Compensation expense related to redemption
of stock options and repriced options - 4,635 -
Deferred taxes - - 380
Minority interest - - 572
Change in assets and liabilities:
Purchases of loans and accounts
receivable portfolios (12,835) (23,176) (43,186)
Other assets (15,334) (13,245) 2,894
Accounts payable and other liabilities 8,020 (5,316) (7,789)
-------- -------- --------
Net cash from operating activities and
portfolio purchasing 24,792 (3,652) 12,066
-------- -------- --------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (18,316) (877) (168,900)
Investment in FINCO - (2,500) (2,500)
Acquisition of property and equipment (18,398) (18,437) (13,480)
Purchases of loans and accounts receivable
portfolios for resale to FINCO (86,910) (56,664) (9,134)
Sales of loans and accounts receivable
portfolios to FINCO 86,910 56,664 9,134
Other - 265 261
-------- -------- --------
Net cash from investing activities (36,714) (21,549) (184,619)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from term loans 150 400,000 225,000
Borrowings under revolving credit agreement 341,950 289,700 230,000
Repayments under revolving credit agreement (322,950) (302,200) (236,350)
Repayments of debt (3,315) (397,448) (36,618)
Deferred financing fees (125) (21,242) (3,882)
Proceeds from issuance of preferred and
common stock 426 300,237 -
Repurchase of preferred stock, common stock
and warrants - (223,208) -
Redemption of stock options - (3,927) -
Recapitalization fees - (19,466) -
-------- -------- --------
Net cash from financing activities 16,136 22,446 178,150
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,214 (2,755) 5,597
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,059 8,814 3,217
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,273 $ 6,059 $ 8,814
======== ======== ========
(Continued)
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest $ 49,151 $ 51,232 $ 43,923
======== ======== ========
Net cash paid (received) during year for taxes $ 2 $ 306 $(10,995)
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Investment in FINCO through exchange of
common stock with MDP $ - $ 7,000 $ -
======== ======== ========
Accrued dividends on mandatorily redeemable
preferred stock $ 15,238 $ 877 $ -
======== ======== ========
Accretion of mandatorily redeemable
preferred stock $ 2,501 $ 205 $ -
======== ======== ========
Notes receivable for common stock $ 1,774 $ - $ -
======== ======== ========
Capital lease obligations incurred for the
purchase of new equipment $ 320 $ - $ -
======== ======== ========
Issuance of voting common stock in partial
payment of asset acquisition $ 2,000 $ - $ -
======== ======== ========
Notes payable in partial payment of asset
acquisition $ 5,000 $ - $ -
======== ======== ========
See notes to consolidated financial statements.
OUTSOURCING SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements include the
accounts of Outsourcing Solutions Inc. ("OSI") and all of its
majority-owned subsidiaries (collectively, the "Company"). Ownership in
entities of less than 50% are accounted for under the equity method. All
significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash,
money market investments, and overnight deposits with original maturities
of less than three months. Cash equivalents are valued at cost, which
approximates market. Cash and cash equivalents held for clients consist of
certain restricted accounts which are used to maintain cash collected and
held on behalf of the Company's clients.
Purchased Loans and Accounts Receivable Portfolios - Purchased loans and
accounts receivable portfolios ("Receivables") acquired in the normal
course of business are recorded at cost. The Company periodically reviews
all Receivables to assess recoverability. Impairments are recognized in
operations if the expected aggregate discounted future net operating cash
flows derived from the portfolios are less than the aggregate carrying
value (see Note 15).
The Company amortizes on an individual portfolio basis the cost of the
Receivables based on the ratio of current collections for a portfolio to
current and anticipated future collections including any terminal value for
that portfolio. Such portfolio cost is amortized over the expected
collection period as collections are received which, depending on the
individual portfolio, generally ranges from 3 to 5 years.
Revenue Recognition - Collections on Receivables owned are generally
recorded as revenue when received. Proceeds from strategic sales of
Receivables owned are generally recognized as revenue when received.
Revenue from collections and outsourcing services is recorded as such
services are provided. Certain collection services are provided on a
contingent fee basis. For these services, revenue is recognized when cash
is collected. Deferred revenue in the accompanying balance sheet primarily
relates to certain prepaid letter services which are generally recognized
as earned as services are provided.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation is computed on the straight-line method based on the estimated
useful lives (3 years to 30 years) of the related assets. Leasehold
improvements are amortized over the term of the related lease.
Intangible Assets - The excess of cost over the fair value of net assets of
businesses acquired is amortized on a straight-line basis over 20 to 30
years. Other identifiable intangible assets are primarily comprised of the
fair value of existing account placements acquired in connection with
certain business combinations and non-compete agreements. These assets are
short-lived and are being amortized over the assets' periods of
recoverability, which are estimated to be 1 to 3 years. The Company
annually reviews goodwill and other intangibles to assess recoverability.
Impairments will be recognized in operations if the expected future
operating cash flows (undiscounted and without interest charges) derived
from such intangible assets are less than its carrying value.
Deferred Financing Costs - Deferred financing costs are being amortized
over the terms of the related debt agreements.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. The Company recognizes the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for
expected future tax consequences of events that have been recognized in the
consolidated financial statements. The Company evaluates the recoverability
of deferred tax assets and establishes a valuation allowance to reduce the
deferred tax assets to an amount that is more likely than not to be
realized.
Environmental Costs - All of the Company's environmental proceedings relate
to discontinued operations of former divisions or subsidiaries of The Union
Corporation (See Note 2). Costs incurred to investigate and remediate
contaminated sites are charged against the environmental reserves
established in conjunction with the Union acquisition.
Stock-Based Compensation - The Company accounts for its stock-based
compensation plan using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation, requires that companies using the
intrinsic value method make pro forma disclosures of net income as if the
fair value-based method of accounting had been applied. See Note 12 for the
fair value disclosures required under SFAS No. 123.
Comprehensive Income - Effective January 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income, which established standards for
the reporting and display of comprehensive income and its components. The
adoption of this statement did not affect the Company's consolidated
financial statements for each of the three years in the period ended
December 31, 2000. Comprehensive loss for each of the three years in the
period ended December 31, 2000 was equal to the Company's net loss.
Accounting For Transfers of Financial Assets - SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-components
approach that focuses on control. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. Commencing in the fourth quarter of 1998, the
Company began selling, concurrent with its purchase, certain Receivables to
a special-purpose entity, OSI Funding LLC ("FINCO") (see Note 18). SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125,
is effective April 1, 2001. The Company is currently evaluating the impact
of SFAS No. 140 on its consolidated statement of operations and
consolidated balance sheet and does not expect the impact on the Company's
financial condition, cash flows or results of operations to be material.
Segment Information - SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, established standards for the way that
public business enterprises report information about operating segments in
annual financial statements and also established standards for related
disclosures about products and services, geographic areas and major
customers. Management has considered the requirements of SFAS No. 131 and,
as discussed in Note 17, believes the Company operates in one business
segment.
New Derivatives and Hedging Accounting Standard - In June 1998, SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, was
issued and subsequently amended by SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted no
later than January 1, 2001. The statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Company's derivative instruments are interest rate
swaps as further discussed in Note 6. The Company believes these
instruments qualify for hedge accounting under SFAS No. 133 as amended by
SFAS No. 138. As of January 1, 2001, based on the Company's current
derivative instruments, the Company believes that this statement will not
have a material impact on the consolidated statement of operations and
consolidated balance sheet.
Accounting for the Costs of Computer Systems Developed or Obtained for
Internal Use - Statement of Position ("SOP") No. 98-1, Accounting for the
Costs of Computer Systems Developed or Obtained for Internal Use, provides
guidelines for capitalization of developmental costs of proprietary
software and purchased software for internal use. The adoption of SOP No.
98-1 in fiscal 1999 did not have a material impact on the consolidated
statement of operations and consolidated balance sheet.
Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings Per Share - SFAS No. 128, Earnings per Share, is applicable to
companies who have publicly traded equity securities. As such, SFAS No. 128
is not currently applicable to the Company and, accordingly, earnings per
share is not presented.
2. ORGANIZATION, ACQUISITIONS & RECAPITALIZATION
OSI was formed on September 21, 1995 to build, through a combination of
acquisitions and sustained internal growth, one of the leading providers of
accounts receivable management services. In 1999, the Company reorganized
many of its acquired subsidiaries. Account Portfolios, Inc. ("API") changed
its name to OSI Portfolio Services, Inc. Payco American Corporation's
("Payco") largest debt collection subsidiary changed its name to OSI
Collection Services, Inc. and Continental Credit Services, Inc.
("Continental"), A.M. Miller & Associates ("AMM"), Accelerated Bureau of
Collections, Inc. ("ABC"), and former subsidiaries of The Union Corporation
("Union"), Allied Bond & Collection Agency and Capital Credit, merged into
OSI Collection Services. Former Union subsidiary, Interactive Performance,
changed its name to OSI Outsourcing Services, Inc. and the Interactive
Performance and High Performance services subsidiaries merged into OSI
Outsourcing Services. The Company purchases and collects portfolios of
charged-off loans and accounts receivable for the Company's own account,
services accounts receivable placements on a contingent and fixed fee basis
and provides contract management of accounts receivable. The Company's
customers are mainly in the educational, utilities, telecommunications,
retail, healthcare and financial services industries. The markets for the
Company's services currently are the United States, Puerto Rico, Canada and
Mexico.
In October and November 1997, the Company acquired the assets of North
Shore Agency, Inc. ("NSA"), a fee service company specializing in letter
series collection services, and ABC, a fee service company specializing in
credit card collections, for total cash consideration of approximately
$53,800 including transaction costs of $1,173 and common stock of $1,000.
One of the acquisitions contains certain contingent payment obligations,
$4,110 through December 31, 2000, based on the attainment by the newly
formed subsidiary of certain financial performance targets with final
payment due April 2001. Future contingent payment obligations will be
accounted for as additional goodwill as the payments are made.
In January 1998, the Company acquired through a tender offer approximately
77% of the outstanding shares of Union's common stock for $31.50 per share.
On March 31, 1998, the Company acquired the remaining outstanding shares of
Union when Union merged with a wholly-owned subsidiary of the Company. The
aggregate cash purchase price of the Union acquisition was approximately
$220,000 including transaction costs of $10,900 and assumed liabilities.
The Company financed the acquisition primarily with funds provided by an
amended credit agreement. Union, through certain of its subsidiaries,
furnishes a broad range of credit and receivables management outsourcing
services as well as management and collection of accounts receivable. The
Company allocated the total purchase price to the fair value of the net
assets acquired resulting in goodwill of approximately $219,000.
The above acquisitions were accounted for as purchases. The excess of cost
over the fair value of net assets of businesses acquired is being amortized
on a straight-line basis over 20 to 30 years. Results of operations for the
acquired businesses were included in the consolidated financial statements
from their respective acquisition dates.
On December 10, 1999, the Company consummated a transaction with Madison
Dearborn Capital Partners III, L.P. ("MDP") and certain of the Company's
stockholders, optionholders and warrantholders pursuant to which MDP
acquired 75.9% of OSI's common stock, most of the then outstanding capital
stock of OSI was redeemed, the Company refinanced its credit facility and
issued $107,000 of preferred stock (the "Recapitalization"). Total value of
the Company based on the Recapitalization was approximately $790,000.
The Recapitalization had no impact on the historical basis of the Company's
assets and liabilities.
In accordance with the terms of the Recapitalization, the holders of
approximately 85.6% of shares of the Company's common stock outstanding
immediately prior to the Recapitalization received $37.47 in cash in
exchange for each of these shares. In addition, the holders of the
Company's preferred stock, non-voting common stock, warrants and exercised
stock options, which pursuant to the Recapitalization all outstanding
options became vested, received $37.47 in cash in exchange for each of
these instruments. Immediately following the Recapitalization, continuing
shareholders (14.4% before the Recapitalization) owned approximately 8.5%
of the outstanding shares of the Company's common stock.
In connection with the Recapitalization, the Company entered into a new
credit facility providing for term loans of $400,000 and revolving loans of
up to $75,000 (see Note 6). The proceeds of the initial borrowings under
the new credit facility and the issuance of approximately $300,000 of the
Company's preferred and common stock have been used to finance the payments
of cash to cash-electing shareholders, to pay the holders of stock options
and stock warrants exercised or canceled, as applicable, in connection with
the Recapitalization, to repay the Company's existing credit facility and
to pay expenses incurred in connection with the Recapitalization.
During 1999, the Company recorded $57,880 in fees and expenses associated
with the Recapitalization. The total fees and expenses consist of: (i) fees
and expenses related to the debt and equity transactions, including bank
commitment fees and underwriting commissions; (ii) professional and
advisory fees and expenses; (iii) compensation expense relating to the
payment of cash for vested stock options and the payment of change in
control bonuses to certain officers in accordance with the terms of their
respective employment agreements; and (iv) other miscellaneous fees and
expenses. The fees and expenses that could be specifically identified as
relating to the issuance of debt were capitalized and will be amortized
over the life of the debt as interest expense. The fees and expenses that
could be specifically identified as relating to the equity transactions
were charged directly to equity. Compensation expense was charged directly
to expense. Other transaction fees were allocated between debt and equity
based on the Company's estimate of the effort spent in the activity giving
rise to the fee or expense. The allocation of fees and expenses to the
debt, equity, compensation expense and Recapitalization related costs is as
follows:
Compensation Recapitalization
Debt Equity Expense Related Costs Total
---- ------ ------------ ---------------- -------
Direct costs $20,205 $18,571 $10,487 $6,827 $56,090
Allocated costs 895 895 - - 1,790
------- ------- ------- ------ -------
Total $21,100 $19,466 $10,487 $6,827 $57,880
======= ======= ======= ====== =======
On September 29, 2000, the Company through a newly formed limited liability
company, RWC Consulting Group, LLC, acquired certain assets and assumed
certain liabilities of RWC Consulting Group, Inc. ("RWC"), a service
company providing highly-skilled consultants to banks to assist in their
back office functions. Total consideration for RWC included cash of
approximately $16,968 including transaction costs of $225, voting common
stock worth $2,000 (53,376.03 shares) and an 18% unsecured, subordinated
note of $5,000 (interest compounded annually and principal and interest due
September 29, 2003). The cash portion of the purchase price was financed
under the Company's revolving credit facility. The acquisition was
accounted for under the purchase method and the excess of cost over the
fair value of the net assets acquired is being amortized on a straight-line
basis over 30 years. The acquisition contains a certain contingent payment
obligation based on the attainment of a certain financial performance
target over the next three years. The future contingent payment obligation,
if any, will be accounted for as additional goodwill if the payment is
deemed probable.
The unaudited pro forma consolidated financial data presented below
provides pro forma effects of the Recapitalization, the debt
extinguishment, and the RWC acquisition as if such transactions had
occurred as of the beginning of each period presented. The unaudited
results have been prepared for comparative purposes only and do not
necessarily reflect the results of operations of the Company that actually
would have occurred had the Recapitalization, the debt extinguishment and
the acquisition been consummated as of the beginning of each period
presented, nor does the data give effect to any transactions other than the
Recapitalization, the debt extinguishment and the acquisition.
Pro Forma
--------------------
2000 1999
Net revenues $556,964 $514,016
======== ========
Net loss $(14,864) $(25,661)
======== ========
3. PROPERTY AND EQUIPMENT
Property and equipment, which is recorded at cost, consists of the
following at December 31:
2000 1999
---- ----
Land $ 2,109 $ 2,109
Buildings 1,917 1,912
Furniture and fixtures 10,603 7,964
Machinery and equipment 4,176 3,016
Telephone equipment 13,066 9,826
Leasehold improvements 9,056 5,590
Computer hardware and software 57,710 53,843
------- -------
98,637 84,260
Less accumulated depreciation (52,036) (40,613)
------- -------
$46,601 $43,647
======= =======
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
2000 1999
---- ----
Goodwill $471,302 $448,651
Other (fully amortized in 2000) - 34,053
-------- --------
471,302 482,704
Less accumulated amortization (54,218) (72,233)
-------- --------
$417,084 $410,471
======== ========
5. OTHER ASSETS
Other assets consist of the following at December 31:
2000 1999
---- ----
Investment in FINCO $12,000 $12,000
Servicing asset 5,612 1,300
Prepaid postage 5,200 3,326
Other 7,614 6,135
------- -------
$30,426 $22,761
======= =======
6. DEBT
Debt consists of the following at December 31:
2000 1999
---- ----
Term Loan Facility $397,500 $400,000
Revolving Credit Facility 32,000 13,000
11% Series B Senior Subordinated Notes 100,000 100,000
18% Note payable to stockholder (See Note 2) 5,000 -
9% Note payable to stockholder (See Note 2) 4,429 4,429
Other (including capital leases) 534 878
-------- --------
Total debt $539,463 $518,307
======== ========
On April 28, 1997, the Company registered $100,000 of 11% Series B Senior
Subordinated Notes (the "Notes") which mature on November 1, 2006, with the
SEC to exchange for the then existing unregistered $100,000 of 11% Senior
Subordinated Notes (the "Private Placement"). The exchange offer was
completed by May 29, 1997. Interest on the Notes is payable semi-annually
on May 1 and November 1 of each year. The Notes are general unsecured
obligations of the Company and are subordinated in right of payment to all
senior debt of the Company presently outstanding and incurred in the
future. The Notes contain certain restrictive covenants the more
significant of which are limitations on asset sales, additional
indebtedness, mergers and certain restricted payments, including dividends.
In connection with the Recapitalization, the Company entered into a new
credit facility providing up to $475,000 of senior bank financing ("Credit
Facility"). The proceeds of the Credit Facility were used to refinance
$439,602 of indebtedness outstanding on the date of the Recapitalization
which resulted in an extraordinary loss of $4,208 from the write-off of
previously capitalized deferred financing fees. No income tax benefit was
recorded with respect to this write-off. In addition, the Credit Facility
will be used to provide for the Company's working capital requirements and
future acquisitions, if any.
The Credit Facility consists of a $400,000 term loan facility and a $75,000
revolving credit facility (the "Revolving Facility"). The term loan
facility consists of a term loan of $150,000 ("Term Loan A") and a term
loan of $250,000 ("Term Loan B"), which mature on December 10, 2005 and
June 10, 2006, respectively. The Company is required to make quarterly
principal repayments on each term loan beginning January 15, 2000 for Term
Loan B and January 15, 2001 for Term Loan A. Term Loan A bears interest, at
the Company's option, (a) at a base rate equal to the greater of the
federal funds rate plus 0.5% or the lender's prime rate, plus 2.25% or (b)
at the reserve adjusted Eurodollar rate plus 3.25%. Term Loan B bears
interest, at the Company's option, (a) at a base rate equal to the greater
of the federal funds rate plus 0.5% or the lender's prime rate, plus 3.0%
or (b) at the reserve adjusted Eurodollar rate plus 4.0%. Interest rates
for Term Loan A and Term Loan B were 10.05% and 10.80%, respectively, at
December 31, 2000.
The Revolving Facility has a term of six years and is fully revolving until
December 10, 2005. The Revolving Facility bears interest, at the Company's
option, (a) at a base rate equal to the greater of the federal funds rate
plus 0.5% or the lender's prime rate, plus 2.25% or (b) at the reserve
adjusted Eurodollar rate plus 3.25%. The interest rate was 10.04% at
December 31, 2000. Also, outstanding under the Revolving Facility are
letters of credit of $6,834 expiring within a year.
At December 31, 2000, the Company had interest rate collared swap
agreements with several financial institutions for interest rate protection
in the nominal amount of $150,000 and an interest rate swap agreement on
$50,000 nominal amount of its Notes. Under the interest rate collared swap
agreements, the Company pays floating three-month LIBOR between 5.90% and
8.50% in addition to the applicable margin as set forth in the Credit
Facility. In the event, however, the three-month LIBOR falls below 5.90%,
the Company would be required to pay 7.0% plus the applicable margin, until
such time the three-month LIBOR rises above 5.90% at which time the rate
returns to a variable rate. Under the interest rate swap agreement, the
Company pays floating one-month LIBOR plus 3.51%, capped at 11.0% until
November 2002 and 15.0% thereafter. The financial institution has the right
to call the interest rate swap agreement, at its discretion, after November
2001.
The one-month LIBOR rate (Eurodollar rate) at December 31, 2000 and 1999
was 6.6% and 5.8%, respectively. The three-month LIBOR rate (Eurodollar
rate) at December 31, 2000 and 1999 was 6.4% and 6.0%, respectively.
The Credit Facility is guaranteed by substantially all of the Company's
present domestic subsidiaries and is secured by substantially all of the
stock of the Company's present domestic subsidiaries, by substantially all
of the Company's domestic property assets and by certain shares of the
Company's Voting common stock. The Credit Facility contains certain
covenants the more significant of which limit dividends, asset sales,
acquisitions and additional indebtedness, as well as requires the Company
to satisfy certain financial performance ratios.
The Notes are fully and unconditionally guaranteed on a joint and several
basis by each of the Company's current domestic subsidiaries and any
additional domestic subsidiaries formed by the Company that become
guarantors under the Credit Facility (the "Restricted Subsidiaries").
The Restricted Subsidiaries are wholly-owned by the Company and constitute
all of the direct and indirect subsidiaries of the Company except for
certain subsidiaries that are individually, and in the aggregate
inconsequential. The Company is a holding company with no separate
operations, although it incurs some expenses. The Company has no
significant assets or liabilities other than the common stock of its
subsidiaries, debt, related deferred financing costs and accrued expenses.
The aggregate assets, liabilities, results of operations and stockholders'
equity of the Restricted Subsidiaries are substantially equivalent to those
of the Company on a consolidated basis and the separate financial
statements of each of the Restricted Subsidiaries are not presented because
management has determined that they would not be material to investors.
Summarized combined financial information of the Restricted Subsidiaries is
shown below:
2000 1999
---- ----
Total assets $595,750 $584,184
======== ========
Total liabilities $162,493 $123,551
======== ========
Operating revenue $534,193 $504,425
======== ========
Income from operations $50,635 $42,669
======= ========
Net income $14,434 $11,861
======= =======
Maturities of debt and capital leases at December 31, 2000 are as follows:
Capital
Debt Leases
---- -------
2001 $ 14,526 $ 215
2002 17,500 152
2003 37,500 117
2004 40,000 -
2005 187,750 -
Thereafter 241,750 -
-------- -------
Total Payments $539,026 484
========
Less amounts representing interest 47
-------
Present value of minimum lease payments $ 437
=======
7. OTHER LIABILITIES
Other liabilities consist of the following at December 31:
2000 1999
---- ----
Accrued acquisition related office closure costs,
over-market leases and other costs $ 5,665 $ 7,402
Accrued interest 11,854 4,494
Deferred revenue 10,424 10,242
Environmental reserves 21,078 22,218
Other 22,059 23,950
------- -------
$71,080 $68,306
======= =======
The environmental reserves, on an undiscounted basis, at December 31, 2000
and 1999 are for environmental proceedings as a result of the Union
acquisition. The Company is party to several pending environmental
proceedings involving the Environmental Protection Agency and comparable
state environmental agencies. All of these matters related to discontinued
operations of former divisions or subsidiaries of Union for which it has
potential continuing responsibility. Management, in consultation with both
legal counsel and environmental consultants, has established the
aforementioned liabilities that it believes are adequate for the ultimate
resolution of these environmental proceedings. However, the Company may be
exposed to additional substantial liability for these proceedings as
additional information becomes available over the long-term.
8. MANDATORILY REDEEMABLE PREFERRED STOCK
Mandatorily redeemable preferred stock consists of the following at
December 31:
14% Senior
Mandatorily
Redeemable Junior
Preferred Preferred
Stock Stock Total
----------- --------- --------
Balance at December 31, 1998 $ - $ - $ -
Issuance of stock 77,634 7,000 84,634
Accrued dividends 856 21 877
Accretion of preferred stock 205 - 205
------- ------ --------
Balance at December 31, 1999 78,695 7,021 85,716
Accrued dividends 14,887 351 15,238
Accretion of preferred stock 2,501 - 2,501
------- ------ --------
Balance at December 31, 2000 $96,083 $7,372 $103,455
======= ====== ========
On December 10, 1999, in connection with the Recapitalization, the Board of
Directors authorized 50,000 shares of Class A 14% Senior Mandatorily
Redeemable Preferred Stock, no par value and 150,000 shares of Class B 14%
Senior Mandatorily Redeemable Preferred Stock, no par value. Furthermore,
the Company issued 25,000 shares of Class A 14% Senior Mandatorily
redeemable Preferred Stock, ("Class A"), Series A, no par value and 75,000
shares of Class B 14% Senior Mandatorily Redeemable Preferred Stock,
("Class B"), Series A, no par value; collectively referred to as Senior
Preferred Stock; along with 596,913.07 shares of the Company's common
stock, valued at $37.47 per share, for $100,000. The Company may issue up
to one additional series of each Class A and Class B solely to the existing
holders in exchange for shares of Class A, Series A or Class B, Series A.
The liquidation value of each share of Senior Preferred Stock is $1,000
plus accrued and unpaid dividends. Dividends, as may be declared by the
Company's Board of Directors, are cumulative at an annual rate of 14% of
the liquidation value and are payable quarterly. The Company may, at its
option and upon written notice to preferred shareholders, redeem all or any
portion of the outstanding Senior Preferred Stock on a pro-rata basis at
the redemption prices in cash at a stated percentage of the liquidation
value plus cash equal to all accrued and unpaid dividends. The redemption
prices for Class A are 110%, 114%, 107%, 103.5% and 100% of the liquidation
value for the period December 15, 1999 through June 15, 2001, June 16, 2001
through December 14, 2003, December 15, 2003 through December 14, 2004,
December 15, 2004 through December 14, 2005 and December 15, 2005 and
thereafter, respectively. The redemption price for Class B is 100% of the
liquidation value. However, on December 10, 2007, the Company must redeem
all of the shares of the Senior Preferred Stock then outstanding at a
redemption price equal to 100% of the liquidation value per share plus
accrued and unpaid dividends. Pursuant to the Company's financing
arrangements, the payment of dividends and/or the repurchase of shares of
Senior Preferred Stock is allowed as long as no default on the financing
arrangements shall have occurred. The 14% Senior Mandatorily Redeemable
Preferred Stock was recorded at $77,634 to take into account common stock
issued in conjunction with the sale of the Senior Preferred Stock and will
accrete to $100,000 by December 10, 2007 using the interest rate method.
On December 10, 1999, in connection with the Recapitalization, the Company
authorized 50,000 shares and issued 7,000 shares of Junior Preferred Stock
("Junior Preferred Shares"). The liquidation value of each Junior Preferred
Share is $1,000 plus accrued and unpaid dividends. Dividends, as may be
declared by the Company's Board of Directors, are cumulative at an annual
rate of 5% of the liquidation value until December 10, 2003 and then at an
annual rate of 8% thereafter and are payable annually; however the dividend
rate will increase to 20% upon consummation of certain events. The Company
will pay dividends in the form of additional Junior Preferred Shares. The
Company may, at its sole option and upon written notice, redeem, subject to
limitations, all or any portion of the outstanding Junior Preferred Shares
for $1,000 per share plus cash equal to all accrued and unpaid dividends,
through the redemption date, whether or not such dividends have been
authorized or declared. However, on January 10, 2008, the Company must
redeem all of the shares of the Junior Preferred Stock then outstanding at
a redemption price equal to $1,000 per share plus accrued and unpaid
dividends as long as all of the shares of the Senior Preferred Stock have
been redeemed. Upon consummation of a primary public offering having an
aggregate offering value of at least $50,000, each holder of Junior Pre-
ferred Shares shall have the right to convert all, but not less than all,
into shares of voting common stock based upon the public offering price.
9. STOCKHOLDERS' EQUITY AND WARRANTS
Each share of Non-voting common stock is convertible at the shareholders
option into an equal number of shares of Voting common stock subject to the
requirements set forth in the Company's Certificate of Incorporation.
In connection with the Recapitalization, all warrants (46,088.67) then
outstanding were exchanged for cash with each holder receiving cash for the
differential between $37.47 per share and their exercise price of $12.50.
Consequently, there are no warrants outstanding at December 31, 2000 and
1999.
In 2000, the Company issued 50,040.03 shares of its voting common stock at
prices approximating fair value to certain members of senior management in
exchange for cash and interest bearing notes secured by the shares along
with certain personal assets of the members of senior management. The
outstanding principal balances plus accrued interest of these notes
amounted to $1,817 at December 31, 2000 and are classified as a reduction
of stockholders' deficit.
10. INCOME TAXES
Major components of the Company's income tax provision are as follows:
2000 1999 1998
---- ---- ----
Current:
Federal $ - $ - $ -
State 400 550 450
Foreign 194 209 -
------ ------ ------
Total current 594 759 450
------ ------ ------
Deferred:
Federal - - -
State - - 380
Foreign - - -
------ ------ ------
Total deferred - - 380
------ ------ ------
Provision for income taxes $ 594 $ 759 $ 830
====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax reporting purposes.
The Company's deferred income taxes result primarily from net operating
loss carryforward, differences in loans and accounts receivable purchased,
amortization methods on other intangible assets and depreciation methods on
fixed assets.
Net deferred tax assets consist of the following at December 31:
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards $66,210 $52,302
Accrued liabilities 15,894 16,812
Loans and accounts receivable (1,176) 1,382
Property and equipment 392 1,028
Intangible assets 1,236 3,824
Tax credit carryforwards 11,221 3,418
Other 1,402 -
------- -------
Total deferred tax assets 95,179 78,766
Less valuation allowance (95,179) (78,766)
------- -------
Net deferred tax assets $ - $ -
======= =======
The valuation allowance was $95,179 and $78,766 at December 31, 2000 and
1999, respectively. The Company has determined the valuation allowance
based upon the weight of available evidence regarding future taxable income
consistent with the principles of SFAS No. 109, Accounting for Income
Taxes. The $13,567 increase in the valuation allowance during 1999 was the
result of net changes in temporary differences, and an increase in the net
operating loss and tax credit carryforwards. The valuation allowance also
includes amounts related to previous acquisitions from years before 2000.
Future realization of these deferred tax assets would result in the
reduction of goodwill recorded in connection with the acquisitions.
The Company has federal net operating loss carryforwards of $154,951 as of
December 31, 2000 available to offset future taxable income of the
consolidated group of corporations. Since the Recapitalization transaction
on December 10, 1999 constituted a change of ownership, tax law imposes a
limitation on the future use of the Company's net operating loss
carryforwards generated through the date of the change in ownership. The
annual limit is equal to the long-term tax-exempt bond rate times the fair
imputed value of the Company's stock immediately before the change in
ownership. In addition, the Company acquired a net operating loss
carryforward of $3,800 with the acquisition of Union that is subject to
special tax law restrictions that limit its potential benefit. These loss
carryforwards expire between 2010 and 2020.
The Company also has available federal tax credit carryforwards of
approximately $888 which expire between 2003 and 2013 and federal minimum
tax credit carryforwards of approximately $759 which may be carried forward
indefinitely. The Company has various state tax credit carryforwards of
approximately $9,574 with various expiration dates primarily from South
Carolina, Alabama, Georgia and Pennsylvania for new job creation and new
capital investment.
Since the Company has a history of generating net operating losses,
management does not expect the Company to generate taxable income in the
foreseeable future sufficient to realize tax benefits from the net
operating loss carryforwards or the future reversal of the net deductible
temporary differences. The amount of the deferred tax assets considered
realizable, however, is subject to reassessment in future years if
estimates of future taxable income during the carryforward period change.
A reconciliation of the Company's reported income tax provision to the U.S.
federal statutory rate is as follows:
2000 1999 1998
---- ---- ----
Federal tax benefits at statutory rate $(6,411) $(13,257) $(7,994)
State income taxes (net of federal tax
benefits) (12,321) (874) 18
Nondeductible amortization 3,546 3,753 3,414
Other (827) 2,371 249
Foreign 194 - -
Deferred tax valuation allowance 16,413 8,766 5,143
------- -------- -------
Provision for income taxes $ 594 $ 759 $ 830
======= ======== =======
11. RELATED PARTY TRANSACTIONS
In connection with the agreements executed in connection with the
Recapitalization discussed in Note 2, the Company paid transaction costs
and advisory fees to certain Company stockholders. Such costs were $17,092
for the year ended December 31, 1999.
Subject to the agreements executed in connection with the various
acquisitions, the Private Placement discussed in Note 6 and certain
management and advisory agreements, the Company has paid to certain Company
stockholders transaction costs and advisory fees. Such costs were $3,466
for the year ended December 31, 1998.
Under an Advisory Services Agreement, the Company expensed $500 in 2000 for
professional services rendered by MDP, the majority stockholder.
Under various financing arrangements associated with the Company's
acquisitions and credit facility, the Company incurred interest expense of
$2,358, $3,376 and $2,333 for the years ended December 31, 2000, 1999 and
1998, respectively, to certain Company stockholders of which one is a
financial institution and was co-administrative agent of the Company's
prior credit facility.
In December 1997, the Company invested $5,000 for a minority interest in a
limited liability corporation (the "LLC") for the purpose of acquiring
purchased loan and accounts receivable portfolios. The majority interest in
the LLC is held by an affiliate of one of the Company's stockholders. In
the fourth quarter of 1998, the Company wrote down its investment in the
LLC by $3,000 which is included in amortization expense in the accompanying
consolidated statement of operations. The write down resulted from an
analysis of the carrying value of the purchased portfolios owned by the
LLC. In December 1998, the Company entered into an agreement with the
majority owner of the LLC to settle all outstanding disputes relating to
the sourcing and collection of certain purchased loan and accounts
receivable portfolios. As part of the settlement, the Company was paid
$3,000 which was recorded in revenue in the accompanying consolidated
statement of operations.
12. STOCK OPTION AND AWARD PLANS
Under terms of the Company's incentive stock option plans, selected
employees, directors and certain consultants may be granted options and
other awards. The plans are stock award and incentive plans which permit
the issuance of options, stock appreciation rights ("SARs") in tandem with
such options, restricted stock, and other stock-based awards. The plans
reserved 1,150,000 Voting Common Shares for grants and provides that the
term of each award, not to exceed ten years, be determined by the
Compensation Committee of the Board of Directors (the "Committee") charged
with administering the plan.
Under the terms of certain plans, options granted may be either
nonqualified or incentive stock options and the exercise price generally
may not be less than the fair market value of a Voting Common Share, as
determined by the Committee, on the date of grant. SARs granted in tandem
with an option shall be exercisable only to the extent the underlying
option is exercisable and the grant price shall be equal to the exercise
price of the underlying option. As of December 31, 2000, no SARs have been
granted. The awarded stock options vest over three to four years and
vesting may be accelerated upon the occurrence of a change in control as
defined in the plans. The options expire ten years after date of grant.
In June 1999, 25,500 options were repriced from a grant price of $40.00 to
$25.00. In addition, 58,500 options were repriced from a grant price of
$65.00 or $50.00 to $40.00. Simultaneously, the vesting provisions of
certain options were modified to provide for prorata vesting over a
specified number of years. Accordingly, compensation expense of $708 was
recognized during 1999 as a result of these modifications of certain
options and is reflected in the accompanying statement of operations. In
addition, in connection with the Recapitalization, certain options were
exercised and the holders of such options received a cash payment equal to
the exercise price of such options and $37.47, the price per share at which
the Recapitalization was consummated.
A summary of the plans activity is as follows:
Number of
Shares of Stock Weighted
Subject to Average Exercise
Options Price Per Share
--------------- ----------------
Outstanding at January 1, 1998 568,521 $22.78
Granted 64,300 58.83
Forfeited (54,000) 35.19
--------
Outstanding at December 31, 1998 578,821 25.63
Granted 214,000 40.00
Forfeited (104,500) 28.52
Exercised (245,396) 18.59
--------
Outstanding at December 31, 1999 442,925 31.69
Granted 305,420 37.47
Forfeited (38,000) 40.00
Exercised (5,000) 25.00
--------
Outstanding at December 31, 2000 705,345 33.79
========
Exercisable shares at December 31, 2000, 1999 and 1998 were 399,925,
442,925 and 105,784, respectively.
A summary of stock options outstanding at December 31, 2000 is as follows:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted
Average
Remaining
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ------------------------------------- ----------- --------
$12.50 70,175 5.7 years $12.50 70,175 $12.50
$25.00 111,750 6.6 years $25.00 111,750 $25.00
$37.47 305,420 9.6 years $37.47 - $ -
$40.00 218,000 8.1 years $40.00 218,000 $40.00
------- -------
$12.50-$40.00 705,345 7.8 years $33.79 399,925 $30.98
======= =======
The Company accounts for the Plan in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized for the majority of
stock option awards. As required by SFAS No. 123, the Company has estimated
the fair value of its option grants since January 1, 1996. The fair value
for these options was estimated at the date of the grant based on the
following weighted average assumptions:
2000 1999 1998
---- ---- ----
Risk free rate 5.06% 5.0% 5.0%
Expected dividend yield of stock 0% 0% 0%
Expected volatility of stock 0% 0% 0%
Expected life of option (years) 10.0 10.0 10.0
Since the Company's common stock is not publicly traded, the expected stock
price volatility is assumed to be zero. The weighted fair values of options
granted during 2000, 1999 and 1998 were $14.83, $15.74 and $23.14,
respectively. The Company's pro forma information is as follows:
2000 1999 1998
---- ---- ----
Net loss:
As reported $(19,451) $(43,957) $(24,341)
Pro forma (20,836) (45,436) (25,742)
In addition, the Committee may grant restricted stock to participants of
the plans at no cost. Other than the restrictions which limit the sale and
transfer of these shares, recipients of restricted stock awards are
entitled to vote shares of restricted stock and dividends paid on such
stock. No restricted stock has been granted as of December 31, 2000.
13. COMMITMENTS AND CONTINGENCIES
From time to time, the Company enters into servicing agreements with
companies which service loans for others. The servicers handle the
collection efforts on certain nonperforming loans and accounts receivable
on the Company's behalf. Payments to the servicers vary depending on the
servicing contract. Current contracts expire on the anniversary date of
such contracts but are automatically renewable at the option of the
Company.
A subsidiary of the Company has several Portfolio Flow Purchase Agreements,
no longer than one year, whereby the subsidiary has a monthly commitment to
purchase nonperforming loans meeting certain criteria for an agreed upon
price subject to due diligence. The purchases under the Portfolio Flow
Purchase Agreements were $16,371 and $33,303, which includes amounts
purchased and subsequently sold to FINCO (see Note 18), and $25,521 for the
years ended December 31, 2000, 1999 and 1998, respectively.
The Company leases certain office space and computer equipment under
non-cancelable operating leases. These non-cancelable operating leases,
with terms in excess of one year, are due in approximate amounts as
follows:
Amount
------
2001 $18,392
2002 15,882
2003 13,220
2004 12,336
2005 11,598
Thereafter 16,249
-------
Total lease payments $87,677
=======
Rent expense under operating leases was $18,372, $16,974 and $15,800 for
the years ended December 31, 2000, 1999 and 1998, respectively.
14. LITIGATION AND ENVIRONMENTAL
At December 31, 2000, the Company was involved in a number of legal
proceedings and claims that were in the normal course of business and
routine to the nature of the Company's business. While the results of
litigation cannot be predicted with certainty, the Company has provided for
the estimated uninsured amounts and costs to resolve the pending suits and
management, in consultation with legal counsel, believes that reserves
established for the ultimate resolution of pending matters are adequate at
December 31, 2000.
Current operations of OSI and its subsidiaries do not involve activities
materially affecting the environment. However, The Union Corporation, a
subsidiary of the Company, is party to several pending environmental
proceedings involving the United States Environmental Protection Agency, or
EPA, and comparable state environmental agencies in Indiana, Maryland,
Massachusetts, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia.
All of these matters relate to discontinued operations of former divisions
or subsidiaries of Union for which it has potential continuing
responsibility. Upon completion of the acquisition of Union, OSI, in
consultation with both legal counsel and environmental consultants,
established reserves that it believes will be adequate for the ultimate
settlement of these environmental proceedings.
One group of Union's known environmental proceedings relates to Superfund
or other sites where Union's liability arises from arranging for the
disposal of allegedly hazardous substances in the ordinary course of prior
business operations. In most of these "generator" liability cases, Union's
involvement is considered to be de minimus (i.e., a volumetric share of
approximately 1% or less) and in each of these cases Union is only one of
many potentially responsible parties. From the information currently
available, there are a sufficient number of other economically viable
participating parties so that Union's projected liability, although
potentially joint and several, is consistent with its allocable share of
liability. At one "generator" liability site, Union's involvement is
potentially more significant because of the volume of waste contributed in
past years by a currently inactive subsidiary. Insufficient information is
available regarding the need for or extent and scope of any remedial
actions which may be required. Union has recorded what it believes to be a
reasonable estimate of its ultimate liability, based on current
information, for this site.
The second group of matters relates to environmental issues on properties
currently or formerly owned or operated by a subsidiary or division of
Union. These cases generally involve matters for which Union or an inactive
subsidiary is the sole or primary responsible party. In one case, the Metal
Bank Cottman Avenue site, the EPA issued a record of decision on February
6, 1998. According to the record of decision, the cost to perform the
remediation selected by the EPA for the site is estimated by the EPA to be
approximately $17.3 million. The aggregate amount reserved by Union for
this site was $18.2 million, which represented Union's best estimate of the
ultimate potential legal and consulting costs for defending its legal and
technical positions regarding remediation of this site and its portion of
the potential remediation costs that will ultimately be incurred by it,
based on current information. However, Union may be exposed to additional
substantial liability for this site as additional information becomes
available over the long-term. Actual remediation costs cannot be computed
until such remedial action is completed. Some of the other sites involving
Union or an inactive subsidiary are at a state where an assessment of
ultimate liability, if any, cannot reasonably be made at this time.
It is Union's policy to comply fully with all laws regulating activities
affecting the environment and to meet its obligations in this area. In many
"generator" liability cases, reasonable cost estimates are available on
which to base reserves on Union's likely allocated share among viable
parties. Where insufficient information is available regarding projected
remedial actions for these "generator" liability cases, Union has recorded
what it believes to be reasonable estimates of its potential liabilities.
Reserves for liability for sites on which former operations were conducted
are based on cost estimates of remedial actions projected for these sites.
OSI periodically reviews all known environmental claims, where information
is available, to provide reasonable assurance that reserves are adequate.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and the methods and assumptions used to estimate
the fair values of the financial instruments of the Company as of December
31, 2000 and 1999 are as follows. The carrying amount of cash and cash
equivalents and long-term debt except the Notes, approximates the fair
value. The approximate fair value of the Notes at December 31, 2000 and
1999 was $80,000 and $97,000, respectively. The fair value of the long-term
debt was determined based on current market rates offered on notes and debt
with similar terms and maturities. The fair value of Receivables was
determined based on both market pricing and discounted expected cash flows.
The discount rate was based on an acceptable rate of return adjusted for
the risk inherent in the Receivable portfolios. The estimated fair value of
Receivables approximated its carrying value at December 31, 2000 and 1999.
16. EMPLOYEE BENEFIT PLANS
At December 31, 1999 and 1998, the Company had five defined contribution
plans, four of which it acquired through the Union acquisition. During
2000, the Company transferred the assets of three of these defined
contribution plans into OSI's plan. At December 31, 2000, the Company has
two defined contribution plans, one of which it acquired through the Union
acquisition, which provide retirement benefits to the majority of all full
time employees. The Company matches a portion of employee contributions to
the plans. Company contributions to these plans, charged to expense, were
$1,652, $1,654 and $1,570 for the years ended December 31, 2000, 1999 and
1998, respectively.
In November 2000, the Company established a deferred compensation plan for
selected employees who, due to Internal Revenue Service guidelines, cannot
take full advantage of the contributory plan. This plan, which is not
required to be funded, allows eligible employees to defer portions of their
current compensation. To support the deferred compensation plan, the
Company has elected to purchase Company-owned life insurance. The cash
surrender value of the Company-owned life insurance and the deferred
compensation liability were not material at December 31, 2000 as the plan
was established in November 2000.
17. ENTERPRISE WIDE DISCLOSURE
The Company operates in one business segment. As a strategic receivables
management company, the primary services of the Company consist of
collection services, portfolio purchasing services and outsourcing
services. In addition, the Company derives substantially all of its
revenues from domestic customers.
The following table presents the Company's revenue by type of service for
the year ended December 31:
2000 1999 1998
---- ---- ----
Collection services $353,447 $349,708 $334,889
Portfolio purchasing services 87,518 80,391 82,399
Outsourcing services 101,662 74,326 62,112
-------- -------- --------
Total $542,627 $504,425 $479,400
======== ======== ========
18. PURCHASED LOANS AND ACCOUNTS RECEIVABLE PORTFOLIOS FINANCING
In October 1998, a special-purpose finance company, OSI Funding Corp.,
formed by the Company, entered into a revolving warehouse financing
arrangement (the "Warehouse Facility") for up to $100,000 of funding
capacity for the purchase of loans and accounts receivable portfolios over
its five year term. In connection with the Recapitalization, OSI Funding
Corp. converted to a limited liability company and is now OSI Funding LLC
("FINCO"), with OSI owning approximately 78% of the financial interest but
having only approximately 29% of the voting rights. The Company's
investment in FINCO is accounted for under the equity method. In connection
with the establishment of the Warehouse Facility, FINCO entered into a
servicing agreement with a subsidiary of the Company to provide certain
administrative and collection services on a contingent fee basis (i.e., fee
is based on a percent of amount collected) at prevailing market rates based
on the nature and age of outstanding balances to be collected. Servicing
revenue from FINCO is recognized by the Company as collections are
received. All borrowings by FINCO under the Warehouse Facility are without
recourse to the Company.
The following summarizes the transactions between the Company and FINCO for
the year ended December 31:
2000 1999
---- ----
Sales of purchased loans and accounts receivables
portfolios by the Company to FINCO $86,910 $56,664
Servicing fees paid by FINCO to the Company $26,827 $15,228
Sales of purchased loans and accounts receivable portfolios by the Company
to FINCO were in the same amount and occurred shortly after such portfolios
were acquired by the Company from the various unrelated sellers. In
conjunction with sales of Receivables to FINCO and the servicing agreement,
the Company recorded servicing assets which are being amortized over the
servicing agreement. The carrying value of such servicing assets is $5,612
and $1,300 at December 31, 2000 and 1999, respectively.
At December 31, 2000 and 1999, FINCO had purchased loans and accounts
receivable portfolios of $76,908 and $40,010, respectively. At December 31,
2000 and 1999, FINCO had outstanding borrowings of $67,636 and $32,051,
respectively, under the Warehouse Facility.
FINCO's summarized results from operations for the years ended December 31,
2000 and 1999 are as follows:
2000 1999
---- ----
Net revenues $76,578 $40,708
Income from operations 4,363 1,759
Net income 702 56
19. NONRECURRING EXPENSES
After the Company's formation and seven acquisitions, the Company adopted a
strategy to align the Company along business services and establish call
centers of excellence. As a result, the Company incurred $5,063 of
nonrecurring conversion, realignment and relocation expenses for the year
ended December 31, 1999. These expenses include costs resulting from the
temporary duplication of operations, closure of certain call centers,
hiring and training of new employees, costs of converting collection
operating systems, and other one-time and redundant costs. No additional
costs have been accrued at December 31, 1999.
In continuing the above strategy, the Company incurred $2,742 of
nonrecurring realignment expenses for the year ended December 31, 2000.
These expenses include costs resulting from closure of certain call
centers, severance associated with these office closures and certain other
one-time costs. No additional costs have been accrued at December 31, 2000.
20. QUARTERLY FINANCIAL DATA (unaudited)
2000 First Second Third Fourth
---- ----- ------ ----- ------
Revenues $133,250 $137,373 $133,871 $138,133
Income from operations 10,988 10,175 9,679 11,235
Net loss (3,380) (5,203) (5,763) (5,105)
1999 First Second Third Fourth
---- ----- ------ ----- ------
Revenues $129,247 $127,829 $122,987 $124,362
Income (loss) from operations 9,087 10,027 8,307 (14,146)
Loss before extraordinary item (3,554) (2,992) (4,698) (28,505)
Net loss (3,554) (2,992) (4,698) (32,713)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Outsourcing Solutions Inc.:
We have audited the accompanying consolidated financial statements of
Outsourcing Solutions Inc. and its subsidiaries as of December 31, 1999, and for
each of the two years in the period ended December 31, 1999, and have issued our
report thereon dated March 28, 2000; such consolidated financial statements and
report is included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of Outsourcing Solutions Inc. and its
subsidiaries as of December 31, 1999 and for each of the two yers in the period
ended December 31, 1999, listed in the accompanying index at Item 14(a)2. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
St. Louis, Missouri
March 28, 2000
Outsourcing Solutions Inc. and Subsidiaries Schedule II
Valuation and Qualifying Accounts and Reserves
For the year ended December 31, 2000, 1999 and 1998
(in thousands)
Column A Column B Column C
--------- --------- ----------- Column D Column E
Additions ----------- --------
----------- (B)
Balance Charged to Deductions Balance
@ beg. of Charged to Other (Please @ end of
Description Period Expense Accounts (A) explain) Period
------------ --------- ---------- ------------ ----------- --------
Allowance for doubtful accounts:
2000 529 671 - 753 447
=== ==== == ==== ===
1999 1,309 651 - 1,431 529
===== ==== == ====== ===
1998 538 108 798 135 1,309
=== ==== ==== ==== =====
(A) For 1998, Union balance at date of acquisition.
(B) Accounts receivable write-offs and adjustments, net of recoveries.